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

Model Answer: 

Method of calculating India’s GDP

Method of calculating India’s GDP changed in 2015, a move made by the Indian government to better align the country’s GDP calculation with international standards.

Main differences between the two methodologies

Here are the main differences between the two methodologies:

1. Base Year: The base year is significant in GDP calculation as it allows for adjustment for inflation, thus enabling a more accurate comparison across different years. Before 2015, the base year was 2004-2005. After the change in 2015, the base year was revised to 2011-2012. This revision reflects more recent economic structures and conditions.
2. Methodology: Prior to 2015, India calculated its GDP using a factor-cost method, which included the sums of wages, rents, interest, and profits. However, in 2015, the Central Statistics Office of India (CSO) adopted the methodology recommended by the United Nations System of National Accounts (SNA) 2008. The new method calculates GDP based on market prices, which include indirect taxes and exclude subsidies.
3. Coverage of Sectors: The new methodology introduced in 2015 has broader coverage. It includes under-represented and emerging sectors of the Indian economy, such as panchayat (local self-governments in villages), e-commerce, and many more small and medium industries.
4. Data Sources: Before 2015, the GDP was calculated using data primarily from the Annual Survey of Industries (ASI). However, the ASI covered only organized sector factories. In the new methodology, data from the Ministry of Corporate Affairs (MCA-21) is used. This dataset provides information on a larger set of companies, including small, medium and large enterprises.
5. Inclusion of Gross Value Added (GVA): In the new methodology, the GDP is measured as GVA at basic prices plus taxes on products minus subsidies on products. The GVA at basic prices includes production taxes and excludes production subsidies.

These changes were aimed at providing a more accurate picture of the economic activity in India. However, they also resulted in some controversy due to the substantial increase in the GDP growth rate that was reported after the change in methodology. Critics argue that the new calculation method inflates the GDP figures and doesn’t reflect the ground reality of India’s economic health. Despite these criticisms, the new methodology is seen as more aligned with international best practices.