General Studies (Paper - 3) : Model Question & Answers

Question: What are some important changes incorporated in GDP measurement in India? Do you think these changes will make GDP a better welfare measure?

Answer: The following are the major changes incorporated in the just-concluded base-year revision:

(i) Headline growth rate will now be measured by GDP at constant market prices compared to growth rate in GDP at factor cost at constant prices earlier

(ii) Sector-wise estimates of gross value added (GVA) will now be given at basic prices instead of factor cost. The relationship between GVA at factor cost, GVA, at basic prices, and GDP (at market prices) is given below:

GVA at basic prices = CE + OS/MI + CFC + production taxes less production subsidies
GVA at factor cost = GVA at basic prices - production taxes less production subsidies
GDP = Σ GVA at basic prices + product taxes - product subsidies
(where CE: Compensation of employees; OS: Operating surplus; MI: Mixed income; and, CFC: Consumption of fixed capital).

(iii) Base year for GDP calculation has been revised from 2004-05 to 2011-12. Although the government claims that new GDP figures use improved data, some concerns remain. For example, GDP at market prices will be more impacted only by higher indirect taxes, while only higher indirect taxes can negatively impact the consumption expenditure which reflects lower level of welfare.