Conundrum of GDP Numbers

India’s new GDP calculations have puzzled and surprised most people, including senior officials in the finance ministry and in the RBI. India has carried out two major changes in calculation, altering both the base year and the calculation methodology. The results are, frankly, hard to believe. The net size of the economy is reckoned to be much the same under both methods. But the new method claims that the GDP has grown much faster over the past two fiscals. This year, the GDP growth rate is set to overtake that of China, which has slowed down. A pure “bottom-up” investor would advocate ignoring changes in GDP calculation and concentrate only on the macroeconomic data which impact stock markets, i.e., look at interest rates, inflation, housing mortgages, vehicle sales, corporate earnings, etc. But none of those data support claims of faster GDP growth. The changes were necessary. Base years need to be updated every so often and there was a need to change to a value-added system, since that is how taxation is computed. The change of base to 2011-12 from the earlier 2004-05 makes sense. The respective contributions of various sectors to the GDP changes over time. Adjusting inflation data is also hard when inflation has been high for long periods, as in India. Most countries update GDP base years regularly. China updates the base year once every five years. Nigeria offered another recent example of changing base. Nigeria changed its base year to 2010 in 2014, from an earlier base of 1990. The new Nigerian estimate claimed that its economy was about $509 billion in size and thus about 90 per cent larger than the $267 billion size claimed in the old estimate. India did not declare a higher GDP in 2014-15. The new calculation claims that the economy was smaller in 2011-12 and thus higher rates of growth were registered in 2012-13, especial

This article was originally published on April 10, 2015.