India's GDP Reshuffle: Decoding The Numbers, Narrative, And Nuances Of The New 2022-23 Base Year

For years it has been argued that we need to have more contemporary base years to capture adequately the changes taking place in the economy. That has been accomplished with the new series for the GDP that has 2022-23 as the base year. It has a revamped basket of goods and services, relevant data sources, and uses the double-deflation approach. The last is important because normally all output is reckoned in nominal terms and then deflated to capture the price effect to arrive at the real numbers, which is what we look at when talking of growth. The double deflation process is one which does a similar process for inputs, too, thus giving a better picture of real output.

First, in terms of the economic outlook for the year, there has not been much change, with the 7.4% growth number for the year being revised to 7.6%. But as would be the case when new series are introduced, there are sharp changes in the growth rates for the earlier years, as they come down for FY24 from 9.2% to 7.2% and increase from 6.5% to 7.1% for FY25. But the story that we are on the 7% growth path is retained, and it does look like that the rate will be between 7 and 7.5% in FY27 too, notwithstanding the Iran-USA imbroglio.

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The second interesting feature is the revaluation of nominal and real GDP in absolute terms. Whenever a new base year is taken, the absolute numbers are the same for nominal and real GDP, which is Rs 261.2 lakh crore. This is lower than that in the old series by almost Rs 7.8 lakh crore, as several items have been moved out of the series which are no longer relevant and others added that may not have compensated for the lower value.

From here on, the nominal GDP numbers have been lower than in the previous series, while the real GDP (which is adjusted for inflation) is higher. This is but natural when the base year is advanced to 2022-23. For the real GDP, it may not matter, as what is important is growth rate. But for the nominal GDP, the number becomes important when reckoning ratios, which are used in policies like the fiscal deficit ratio. With the GDP number being lower, the fiscal deficit ratio becomes higher. A similar issue will be faced when reckoning the current account deficit, which is always expressed as a percentage of the GDP.

The third feature of the new series which stands out is the rather lower share of consumption in the nominal GDP. The earlier series had a ratio in the range of 60% plus. However, in this revised series, it comes down to 56.7%. The difference may not appear to be significant but is indicative of consumption being marginally less important. This is more due to the post-Covid period, which was associated with higher inflation, which kept demand down. The same for gross fixed capital formation increases from around 30% to 31.7%, though it came down from 32.4% in FY23. This does change the narrative of the investment story, as the ratio is high.

Lastly, the most enigmatic difference, however, is in the sectoral performance. Compared with the earlier series, agriculture has underperformed, as have electricity, gas, and water. The big change is the component of public administration, defence, and other services, which has grown by 5.8% against 9.9% earlier. This is more due to the methodology being adopted and the signal given that there could have been over-estimation in the past.

Construction and finance, real estate, etc. groups have maintained their growth rates, while the over-performers are mining (turns positive at 4.1% from negative), manufacturing and trade, transport, hotels, etc. Manufacturing is probably the positive outlier with the average growth of 11.2% in the last 3 years, with two being double digits. It was 7.9% earlier. Clearly, better capture of data from advanced sources has provided the right picture, as this is one sector dominated by the unorganised segment where data challenges existed. The anomaly here, however, is that the index of industrial production, which is still on the old base, has shown weakness in the first 10 months with a growth of just 4%.

The same has been seen for trade, transport, etc., which is also biased towards the unorganised segment where the average growth is up from 7% to 8.9%. This can be attributed more to the formalisation of the economy, where a large number of MSMEs, which were outside the system, have not gotten themselves enrolled to draw benefits, which in turn helps to capture their performance.

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The new series doesn’t alter the growth story but adds value in terms of coverage and is rich in approach. The clue is to keep revising the basket periodically, after every five years. This has to be done for all the data series so that they are synchronised. The world is changing and so is the structure of the economy, which has to be captured appropriately. Digitisation has enabled a lot of data to be captured, which can be used in this process.

With the digital processes becoming more comprehensive in the country, there is the advantage of linking all the data and relying less on imputation. This is probably the biggest success of the revamped series on the GDP and the CPI, which will also be witnessed once the IIP and the WPI series are out in the course of the year. Therefore, the thrust given by the government relentlessly on digitisation has helped to strengthen the data systems in the country, giving better signals on the working of the economy. This will, in turn, help in sharper policy responses.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.

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