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India embraces new formula to measure GDP
Fri, 30 Jan Pre-Open

In another initiative by Modi government, India will soon recalibrate the way it measures the gross domestic product (GDP) for the country. This step is largely taken to reflect informal and under-represented economic sectors.

As reported in Mint, the Central Statistics Office will be measuring growth by gross value-added (GVA) at basic prices, instead by GDP at factor cost. This new measurement will be released today for three years till 2013-14, taking into account new base year of 2011-12, thereby replacing 2004-05. Reportedly, the new method was recommended by the United Nations System of National Accounts in 2008 and will make India's GDP growth numbers comparable with that of developed nations.

Change in the revision of the method of calculating national accounts and other macro data is usually done in every five years. This is done to bring in a newer base year and adjusting for changes in the economy. The initiative is expected to show that Asia's third largest economy is larger than previously estimated.

The new measure might show up a rosy picture of the economy and could theoretically revise up the growth estimates. However, it is imperative to note that these are just statistical numbers, and not an objective reality. The statistical numbers certainly give direction to the government to take appropriate decisions. But such numbers could be more useful when they are used to draw the policy framework rather than drive public attention.

Let's take a recent example. As reported in a financial daily in March 2010, when India last revised the national accounts its annual economic growth estimates were revised upward by 0.8% to 1.7% for four years. While this gave an opportunity to the previous government to take credit for the country's highest-ever stretch of economic growth, it hardly made any difference to the ground realities.

Investors will be better off if they do not get carried away by such noises and view the data in conjunction with development that takes place in the country.

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