India would move to Chain Base GDP

The Government of India is exploring to switch over to a new and progressive methodology to calculate Gross Domestic Product (GDP). The new methodology may be chain base system in place of existing fixed base system.

THE FIX BASE SYSTEM

This method is in vogue in India. In this method weight assignment to various economic activities and goods remain fix for specific period which can range from 5 to 10 years or a period as decided by the government. This helps comparing the trend of growth over 5 -10 years on the same parameters with the same weight assigned. 

THE CHAIN BASE SYSTEM 

In this system the weight assigned index keeps on changing and changes are incorporated annually. Thus the structural changes of the economy are adjusted quickly. Also the activities are updated and captured annually. This method appears more correct as the economic activities are updated and captured every year based on the current prices.

In many foreign countries chain base system is being used.  US shifted to the chain base weighted index in 1996 and many EU countries have also moved to this system. If India moves on to this system, it will be easy and realistic to compare the economic indicators with these countries.

THE CHALLENGES IN INDIA

Moving from existing fixed base to chain base system in India is challenging because of   delayed availability of data which normally comes with the lag of 2 years. However, with the speed of digitisation and automation is taking place in India, switching to chain base system is not very difficult.

 The indicators computed under chain weighted index system are closer to nominal number which being calculated on current prices, are more realistic as compared to real number which are inflation adjusted. 

KNOW THE GROSS DOMESTIC PRODUCT (GDP)

Now days GDP numbers are in discussions because of economic slowdown and therefor you must know broadly what the GDP is?

“The GDP of a country is sum total of values of goods and services produced in any given year”. The formulae is 

 GDP = Private consumption + Gross investment + Government spending + (Export – Import)

In India the GDP is calculated by Central Statistical Office (CSO) by 2 methods -

1. At  factor cost basis 

Under this category economic activities RSS at factor cost basis and performance of eight different industries are assessed which are

I. agriculture forestry and fisheries

II. Mining and quarrying 

III. Manufacture

IV. Electricity gas and water supply

V. Construction 

VI. Trade, Hotels, transport and communication

VII. Financing, Insurance real estate and business services

VIII. Community personal and social services

2. At  Expenditure at market price basis

The economic activities assessed at market prices which indicates how different areas of the economy such as trade, investment, personal consumption are doing.

Nominal GDP - it is calculated on current market prices

Real GDP - it is calculated adjusting inflation

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                                                   -     Shive Mishra