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

Gross Domestic Product (GDP) is the final value of goods and services produced within the domestic territory of an economy in a particular financial year. In India, economic growth is measured as change in GDP at constant prices. 

The Central Statistical Office (CSO), in 2015, changed its methodology to calculate GDP as recommended by the United Nations System of National Accounts.

The following were the major changes introduced in 2015:

1. In 2015, the Central Statistics Office (CSO) did away with GDP at factor cost and adopted the international practice of GDP at market price and the Gross Value Addition (GVA) measure to better estimate economic activity.

GDP at market price = GDP at factor cost + Indirect Taxes – Subsidies

2. Sector-wise wise estimates of Gross Value Added (GVA) would be provided at basic prices from 2015 onwards instead of factor cost which was the earlier norm.

GVA at basic prices = GVA at factor cost + (Production Taxes – Production Subsidies)

3. Broadening of data pool: Previous data was sampled from Annual Survey of Industries (ASI), which comprised about two lakh factories. But the new database draws data from the Ministry of Corporate Affairs (MCA21) where more than five lakh odd companies registered.

4. Change in calculation of Labour and Agricultural Income: In the new series, an Effective Labour Input (ELI) method is used. This method distinguishes workers on productivity by assigning weights to different categories of workers (such as owner, hired professional or a helper), changing overall output contributed by these sectors.

5. Changes in calculation of agricultural income: Value addition in agriculture is now taken beyond farm produce. Livestock data is critical to new methods. Value attached to by-products of meat.

All these changes were made to align Indian accounts as per IMF approved methodology. However, this approach can work seamlessly in an economy where all value addition is tracked formally. Thus, new methodology will be successful only if all the disaggregated information in MCA21 database on activities of a firm is classified properly into appropriate sectors.