Model Answer:
India's method for calculating its Gross Domestic Product (GDP) underwent a significant change in 2015. This shift was implemented to better align with global standards and to provide a more accurate representation of the country's economic activity. The revision has had substantial implications for how India's economic growth is measured and understood.
Before 2015, India used the following approach to calculate GDP :
Base Year: The calculations were based on 2004-05 as the base year.
Pricing Method: GDP was calculated at factor cost, which measured the income received by factors of production (land, labor, capital, and entrepreneurship).
Data Sources: The methodology relied heavily on production and expenditure data from various sectors.
Coverage: It had limited coverage of the unorganized sector and newer areas of the economy.
Indicators: Used a mix of volume-based and value-based indicators to estimate economic activity.
The new methodology, implemented in 2015, brought several changes:
Base Year: Updated to 2011-12, providing a more recent reference point for calculations.
Pricing Method: Shifted to calculating GDP at market prices, which includes taxes and excludes subsidies. This aligns with the System of National Accounts (SNA) recommended by the United Nations.
Data Sources: Expanded to include more comprehensive data from the Ministry of Corporate Affairs' MCA-21 database, providing better coverage of the corporate sector.
Coverage: Improved representation of the informal sector and inclusion of newer economic activities.
Indicators: Greater emphasis on using value-based indicators over volume-based ones, particularly in the manufacturing sector.
Gross Value Added (GVA): Introduction of GVA at basic prices as a key measure of economic activity at the industry level.
Sector Contributions: Changes in how sector contributions are calculated, particularly for the services sector.
Better Representation: Improved capture of value addition in the manufacturing sector and better representation of the informal economy.
International Comparability: The new method aligns more closely with international standards, making India's GDP figures more comparable globally.
Policy Implications: The revised methodology influences policy decisions and economic forecasting.
The 2015 revision of India's GDP calculation methodology represented a significant shift in how the country measures its economic output. By adopting market prices, updating the base year, and expanding data sources, India aimed to provide a more accurate and comprehensive picture of its economy.
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