The economy, its math and politics

Why in the News

A former Economic Affairs Secretary in the Ministry of Finance has claimed that nominal Gross Domestic Product (GDP) growth in the first quarter of 2026-27 was 2.6 per cent, against the 10.3 per cent estimated by the Ministry of Statistics and Programme Implementation (MoSPI). Adjusted for inflation of 2 to 2.5 per cent, that arithmetic puts real growth at zero rather than at the official 7.8 per cent. The claim was built by comparing the April-June 2025 GDP level computed on the old 2011-12 base year with the April-June 2026 level computed on the 2022-23 base year that MoSPI adopted in February 2026. Splicing two series produces a growth rate that measures neither of them. The contest is between an official estimate the government spent a week publicly defending and a public mood in which a very low growth number was readily believed.

What is a base year in GDP computation?

1. The purpose: A base year fixes the set of prices at which output in every later year is valued, so a change in the measured total reflects a change in volume and not a change in prices.
2. Nominal against real: Nominal GDP values output at the prices ruling in the year it was produced. Real GDP values that same output at base year prices, which is what makes growth comparable across years.
3. The worked illustration: A country producing only crude oil sells 10 million barrels at $10 in year 1, giving a GDP of $100 million, then 5 million barrels at $30 in year 2, giving $150 million. Measured at year 1 prices, year 2 output is $50 million, so the economy has contracted by half even though its nominal GDP rose 50 per cent.
4. What the base year carries: It fixes the relative prices and the weights of the period chosen, and those weights then run through every year of the series.

Why is the base year revised every five to six years?

1. Consumption patterns move: What households spend on shifts substantially over a decade, so an old price structure misvalues what the economy now produces. Eg. Telecom tariffs collapsed after 2016 and digital services barely existed as a separate category in 2011-12.
2. Measurement itself improves: Technology and method allow faster and more precise capture of output and prices than were available when the previous base was set.
3. Administrative data replaces proxies: The 2022-23 series draws on Goods and Services Tax returns, the Public Financial Management System for central government accounts, e-Vahan for transport spending, and the Annual Survey of Unincorporated Sector Enterprises and the Periodic Labour Force Survey for the informal economy.
4. Every earlier year is restated: When the base moved from 2011-12 to 2022-23, the GDP values changed for all years from 2011-12 onwards, so growth must be computed between two comparable periods within the new series.

Where did the disputed calculation go wrong?

1. The splice: The claim took the April-June 2025 level from the 2011-12 series and the April-June 2026 level from the 2022-23 series, then divided one by the other.
2. What that number actually measures: A ratio across two series captures the gap between two different valuations of the economy, not the change in output between two quarters.
3. The office lent the claim weight: The claimant had headed the Department of Economic Affairs and was designated Finance Secretary, which is why the government machinery responded for most of a week rather than ignoring the claim.
4. The rebuttal crossed party lines: A Congress Rajya Sabha member who is himself critical of the government’s economic management wrote publicly that the arithmetic behind the real growth estimate was not among the things wrong with India’s economy.

Why did a wrong number travel so far?

1. Perception ran ahead of the arithmetic: A low growth number was plausible to a section of readers before any of them checked how it was derived.
2. The protest backdrop: The claim landed during the Jantar Mantar protests, which had already made the government’s economic record a live public argument.
3. The employability gap: An education system that does not leave its graduates job ready weakens the link between a headline growth number and what people observe.
4. The demographic pressure: More than a crore young people enter the job market every year, so growth is judged against absorption rather than against output.
5. Political amplification and its limit: The Congress and several of its leaders amplified the claim. The Leader of the Opposition in the Lok Sabha, a standing critic of the government’s economic policy, did not comment on it.

Challenges to the 2022-23 GDP series

1. The deflator is built for goods: Converting nominal output into real output leans heavily on the Wholesale Price Index, which carries no services component at all. Eg. Services are close to 55 per cent of gross value added and are deflated using price indices constructed for wholesale goods transactions.
   The Fix: Complete the Wholesale Price Index base revision and introduce a Producer Price Index, which is the standard deflator in most large economies.
2. The corporate database carries inactive firms: Private corporate value added is estimated from company filings, which can include shell and dormant entities. Eg. A National Sample Survey Office technical report on the corporate affairs database found a large share of sampled companies untraceable or wrongly classified.
   The Fix: Publish an annual reconciliation of the active company frame against Goods and Services Tax filings before the frame is used for estimation.
3. Independent verification lags the release: The detailed sources and methods document that lets researchers reproduce the estimates is published well after the series itself. Eg. After the 2011-12 revision, the back series for years before that base remained contested for years, with a committee estimate and the official estimate disagreeing about growth in the 2000s.
   The Fix: Release the sources and methods volume on the same day as the new series rather than as a follow-up publication.
4. Growth is not tracked by tax collections: High measured nominal growth that is not matched by proportionate corporate tax receipts leaves the estimate open to challenge. Eg. Direct tax buoyancy has repeatedly diverged from nominal GDP growth in years of strong headline expansion.
   The Fix: Publish the nominal GDP to tax base reconciliation alongside quarterly estimates, so the divergence is explained rather than argued over.

Conclusion

The arithmetic is settled and the credibility question is not. Two incompatible growth claims about the same quarter circulated side by side because most readers have no way to adjudicate between them. A statistical office that must be publicly defended each time a headline number is disputed is carrying a trust problem that no revision of the base year resolves. The transition to the 2025 System of National Accounts, due by 2029-30, is the next occasion on which that gap is either closed or carried forward.

What is National Income Accounting?

1. About: National income accounting is the set of methods used to measure economic activity across a national economy as a whole, producing indicators such as GDP, Gross National Product and Net National Income.
2. Rationale: National accounts give fiscal policy, monetary policy, welfare targeting and cross-country comparison a single common measurement base.
3. Named typology, the three methods: The production method sums value added at each stage across agriculture, industry and services. The income method sums rent, wages, interest, profit, mixed income and net income from abroad. The expenditure method totals consumption, investment, government spending and net exports.
4. Who compiles it in India: The National Statistical Office under MoSPI prepares the estimates using the benchmark indicator method.

Laws and Rules Governing National Income Accounting

1. Collection of Statistics Act, 2008: Empowers the Centre, State governments and local bodies to collect statistics on economic, demographic, social, scientific and environmental matters, and makes furnishing the information a legal obligation.
2. Collection of Statistics Rules, 2011: Prescribe how a statistical collection is notified and how statistics officers are appointed and their powers exercised.
3. Collection of Statistics (Amendment) Act, 2017: Extended the parent Act to Jammu and Kashmir, closing a jurisdictional gap in national statistical collection.

Key Facts about National Income Accounting

1. National Statistics Day is observed on 29 June, the birth anniversary of P.C. Mahalanobis.
2. MoSPI was created in 1999 by merging the Department of Statistics with the Department of Programme Implementation.
3. The National Statistical Commission was set up in 2005 on the recommendation of the Rangarajan Commission and remains a non-statutory advisory body.
4. The first estimate of India’s national income was made by Dadabhai Naoroji in 1868, and the first official post-Independence estimates came from the National Income Committee of 1949.

Challenges in National Income Accounting

1. The unorganised economy resists direct measurement: A large share of output comes from unregistered enterprises that file no accounts, so their contribution is surveyed and then projected forward. Eg. The informal sector contributed roughly 45 per cent of gross value added in 2022-23.
   The Fix: Shorten the interval between unincorporated enterprise surveys so projection periods are measured in months rather than years.
2. Final and intermediate goods are hard to separate: Counting the same output twice inflates the total, and the distinction depends on who buys the good rather than on the good itself. Eg. Flour bought by a bakery is an intermediate input, and the identical flour bought by a household is final consumption.
   The Fix: Extend the Supply and Use Tables framework, which balances production against consumption and forces the discrepancy to surface.
3. Non-market work is excluded by construction: Subsistence farming, barter and unpaid care work produce real output that no price attaches to, so they never enter the total. Eg. Time use survey data shows women performing several hours of unpaid domestic and care work daily, none of which is counted.
   The Fix: Publish satellite accounts for household and care production alongside the main accounts, as several statistical systems already do.
4. Natural capital depletion is treated as income: Resource extraction adds to measured output and the loss of the resource is not netted out anywhere. Eg. Groundwater drawn beyond recharge in Punjab and Haryana raises agricultural value added. The stock that produced it shrinks, and nothing in the accounts records the loss.
   The Fix: Build a Green GDP series that deducts resource depletion and pollution costs, reported as a companion to the headline estimate.

Matching Previous Year Question

“Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”