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New GDP Formula Gets Chidambaram's Thumbs Up; May Boost Growth

New GDP Formula Gets Chidambaram's Thumbs Up; May Boost Growth

Written by Varun Sinha | Updated: Feb 03, 2015 10:16 IST

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Here are 10 things to know about the GDP revision :

1) So far, domestic GDP was calculated at factor or basic cost, which took into account prices of products received by producers.

2) The new formula takes into account market prices paid by consumers. It is calculated by adding GDP at factor price and indirect taxes (minus subsidies). It is in line with international practice and is expected to better capture the changing structure of the Indian economy.

3) The government has also changed the base year for estimating GDP from 2004-05 to 2011-12. This has been done to incorporate the changing structure of the economy, especially rural India.

4) Data for the new GDP series will now be collected from 5 lakh companies (against 2,500 companies earlier), HSBC says. Under-represented and informal sectors as well as items such as smartphones and LED television sets will now be taken into account to calculate the gross domestic product.

5) India's GDP grew at a healthy 6.9 per cent in fiscal year 2013-14 and not 4.7 per cent as reported earlier, according to the revised methodology. This means the previous UPA government was doing much better when it came to managing the economy than what was thought earlier, analysts say.

6) According to Nomura's Sonal Varma, India's manufacturing sector contributed to 17.3 per cent in FY14 GDP (against 12.9 per cent estimated

earlier). Private consumer demand was growing at a much faster pace than estimated earlier, perhaps explaining the sustained inflation surge, she added.

7) The revision in GDP does not alter the size of India's economy ($1.8 trillion) nor will it alter key ratios such as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14. "Our ranking in GDP terms will not change as the size of economy has almost remained the same," chief statistician T.C.A. Anant said.

8) According to Pranjul Bhandari of HSBC, the RBI will assess the new GDP data to set its monetary policy stance. This means the quantum of rate cuts in the coming few months may not be as large as earlier expected because the economy is growing faster-than-estimated. HSBC expects the central bank to cut rates by 75 basis points in 2015. Bank of America Merrill Lynch expects the central bank to cut 100 basis points by April 2016.

9) According to Indranil Sengupta of BofAML, India will grow at 6.6 per cent (against 5.5 per cent forecast) and cross Brazil and Russia in GDP this year to emerge as the second largest BRIC after China.

10) The revised methodology, however, poses several challenges as well. "It is a problem for the government and economists who are trying to understand the exact situation," said D.H. Pai Panandiker of RPG Foundation. "It is even a problem for the RBI, that doesn't have a full view about how the economy is performing."

(With inputs from Reuters)

Category: Bank

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