MoSPI Secy: Nominal GDP revised down as informal sector data has improved

Why in the News

The Ministry of Statistics and Programme Implementation (MoSPI) has stated that the downward revision of nominal Gross Domestic Product (GDP) under the new base year series follows a change in how the informal sector is measured, not a correction of an earlier overstatement. The revision runs across every overlapping year of the two series and was driven by the replacement of proxy based estimates with direct annual surveys. The new series moves the base year to 2022-23 from 2011-12 and was released in February. Two separate criticisms have been put to the Ministry, one that the informal economy is still being read off the performance of listed companies, and the other that the price data used for deflation is the wrong kind. The contest is therefore not about the growth rate but about whether the measurement itself can be trusted.

What changed in the new base year GDP series?

1. The base moved: The series shifts its base year from 2011-12 to 2022-23, and was released in February.
2. The estimation method changed with it: The informal sector is now estimated from direct, empirical annual surveys rather than from proxies carried forward from a base year.
3. The revision is systematic, not a one year correction: Nominal GDP has been revised lower across all overlapping years, meaning 2022-23 to 2024-25 and the subsequent quarters.

Why did nominal GDP fall in the revised series?

1. The old series had no regular unorganised sector survey: MoSPI calculated Gross Value Added (GVA), meaning output net of the cost of inputs used up in producing it, for the unorganised sector by multiplying estimated workforce counts by the Value Added per Worker derived from decadal surveys.
2. Forward projection of the base year figure: The projection used proxies such as formal corporate growth rates, inter survey growth rates and historical tax collections, because no regular data was available.
3. Survey evidence changed the picture: Annual survey evidence made it possible to capture the distinct growth patterns of the informal sector, which had been running on the formal sector’s growth rate by assumption.
4. Informal services, the largest single driver: The single largest driver of the revision is the improved measurement of India’s informal services sector.

How do the new surveys change the measurement?

1. Two surveys replaced the proxies: The Annual Survey of Unincorporated Sector Enterprises (ASUSE), which enumerates unincorporated non agricultural businesses, and the Periodic Labour Force Survey (PLFS), which measures employment and workforce size, now supply the inputs directly.
2. Survey frequency: ASUSE is now available on a quarterly basis and PLFS on a monthly basis, so quarterly GDP no longer waits on a survey that ran once every five years.
3. What is now measured directly: Unorganised sector productivity and workforce size are measured rather than inferred from corporate results.

What is the Annual Survey of Unincorporated Sector Enterprises?

1. What an unincorporated enterprise is: A business run as a proprietorship or a partnership rather than as a registered company. Its accounts are never filed with a corporate registry, so its output cannot be read off company results and has to be counted directly.
2. What ASUSE enumerates: Non agricultural businesses in manufacturing, trade and other services. It covers both establishments that hire workers and own account enterprises run by the proprietor without hired labour.
3. How the units are reached: The survey draws a sample against an area based frame rather than against a registration list, which is what allows it to reach units that appear on no register.
4. Why the frequency changes the estimate: Its predecessor ran roughly once in five years, so every intervening year was filled in by projection. A survey running annually and now quarterly supplies measured values for the same periods the national accounts are compiled for.

Where does the contest over the new series lie?

1. The listed company charge: A former Chief Economic Adviser has argued that the GDP data does not capture the informal economy properly and extrapolates the performance of listed companies. The Ministry’s stated position is that ASUSE is being used for quarterly GDP and proxies are not.
2. The proxies were always bounded: Even in the earlier series proxies were used only between the quinquennial surveys, carried forward from previous base years, which is how the overhang continued.
3. Overestimation is rejected as a framing: The Ministry holds that GDP is an estimation built on the best data available at the time, and that calling the old series an overestimate implies a systematic bias that was not there.
4. The price data objection: A separate criticism concerns the use of producer price data. The Ministry’s answer is that the method of calculation was shifted to producers in the 2011-12 series of the Wholesale Price Index (WPI) itself, and that data for the past 10 years has been collected from industry.
5. What separates the two indices: The WPI excludes exports and imports and includes taxes and trade margins to some extent, while a Producer Price Index (PPI) does not, and the Ministry states those corrections have since been made.
6. The growth is not felt on the ground: The Ministry treats this as a larger question shaped by other factors, uncertainties and the global situation, comparable to how an individual’s experience of prices differs from an inflation rate aggregated across the country.

What is a Producer Price Index?

1. Prices received at the factory gate: A Producer Price Index tracks the change in prices received by domestic producers for their own output at the factory gate. It reads the price at the point of production rather than the price at any later point in the chain.
2. Why the deflator has to match the output: Real output is nominal output divided by a price index, so the index must track the prices of the goods and services being deflated. A mismatch between the output being measured and the prices used to deflate it moves the real growth rate without anything happening in the economy.
3. The services gap: A wholesale price index is built on goods traded in bulk and carries no services. An economy whose output is majority services therefore has no matching price series for its largest component, which is why the deflator is the contested instrument.

Challenges to a base year revision of the national accounts

1. A long gap between base years builds in drift: Holding a base year for more than a decade lets the structure of the economy move away from the weights the series is built on. Eg. The 2011-12 base was carried forward for over a decade on proxies before the present revision replaced it.
   The Fix: Fix a statutory base year revision cycle with a published date, so the revision is a scheduled operation rather than an event that invites suspicion.
2. A revision breaks the comparable series users rely on: Analysts, ratings and fiscal ratios are all computed on a level that has now moved, and back series construction is where most disputes about Indian GDP have historically landed. Eg. The dispute over the back series of the 2011-12 base ran for years after that series was introduced.
   The Fix: Release a fully documented back series alongside the new base, with the method for each sector stated, rather than issuing the levels first and the method later.
3. Deflation remains the weakest link: Converting nominal values to real ones requires price indices that match the output being deflated, and India has no full producer price index for services. Eg. Services form the largest share of output and are deflated using indices built for goods.
   The Fix: Complete and publish a services producer price index so that the largest part of output is deflated on prices collected from services producers.
4. Survey coverage of the informal sector is thin at the edges: An enterprise survey reaches businesses with a recognisable place of operation more easily than it reaches itinerant and home based work. Eg. Home based and own account work is concentrated among women, which is also where labour force measurement is weakest.
   The Fix: Link the enterprise survey to the labour force survey at the household level, so an activity missed as an enterprise is still captured through the worker reporting it.

Conclusion

The disagreement now on record is about method rather than about the growth rate, and the Ministry has taken the position that the new series is the best available and that no obvious correction has been put to it for the next one. That claim is testable, since a statistical system is judged on whether its next revision moves the numbers again in the same direction. The marker to watch is the deflator, because the informal sector question has now been answered with direct surveys while the price side has not been given an equivalent instrument.

Matching Previous Year Question

“[2021, GS3, 10 marks] Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”