# Explained: Gross Value Added (GVA) Method

Note4Students

From UPSC perspective, the following things are important :

Prelims level: GDP, GNP, GVA etc.

Mains level: Not Much

The National Statistical Office (NSO) recently released its provisional estimates of national income for the financial year 2019-20. The release also detailed the estimates of the Gross Value Added (GVA).

#### Try this question from CSP 2011:

Q. In the context of Indian economy, consider the following statements

1. The growth rate of GDP has steadily increased in the last five years.

2. The growth rate in per capita income has steadily increased in the last five years.

Which of the statements given above is/are correct?

(a.) 1 only

(b.) 2 only

(c.) Both 1 and 2

(d.) Neither 1 nor 2

#### The GVA method

• In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to its compilation of national accounts.
• It aims to bring the whole process into conformity with the UN System of National Accounts (SNA) of 2008.

#### What is GVA?

• As per the SNA, GVA is defined as the value of output minus the value of intermediate consumption.
• GVA is a measure of the contribution to GDP made by an individual producer, industry or sector.
• At its simplest, it gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used.
• It can be described as the main entry on the income side of the nation’s accounting balance sheet, and from economics, perspective represents the supply side.

#### How it has changed income calculation?

• While India had been measuring GVA earlier, it had done so using ‘factor cost’.
• GDP at ‘factor cost’ was the main parameter for measuring the country’s overall economic output until the new methodology was adopted.
• GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP.
• In the new series, the base year was shifted to 2011-12 from the earlier 2004-05.

#### GVA estimates by NSO

• As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity.
• The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy.
• These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3) Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services; 5) Construction; 6) Trade, Hotels, Transport, Communication and Services related to Broadcasting; 7) Financial, Real Estate and Professional Services; 8) Public Administration, Defence and other Services.

#### How relevant is the GVA data given that headline growth always refers to GDP?

• The GVA data is crucial to understand how the various sectors of the real economy are performing.
• The output or domestic product is essentially a measure of GVA combined with net taxes.
• However, GDP can be and is also computed as the sum total of the various expenditures incurred in the economy.
• It includes private consumption spending, government consumption spending and gross fixed capital formation or investment spending; these reflect essentially on the demand conditions in the economy.

#### Significance of GVA

• From a policymaker’s perspective, it is vital to have the GVA data to be able to make policy interventions, where needed.
• Also, from global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance.

#### Issues with GVA

• As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources.
• To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure.
• Economists argue that India’s switch of its base year to 2011-12 had led to a significant overestimation of growth.
• They argued that the value-based approach instead of the earlier volume-based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome.

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