How is GDP calculated in India?

by on December 1, 2011

in Economy

The Q2 2011 GDP estimates came out yesterday, and I thought it will be a good time to do a post on how the GDP numbers are calculated in India.

GDP is calculated by the Central Statistics Office and the first set of numbers that come out are the quarterly estimates, which are later revised to show the final numbers.

This information is released on the Ministry of Statistics and Programme Implementation website, and you can access it there on the right side in the “Latest News” section.

GDP can be calculated in several ways, and in India the GDP is calculated in two different ways, and then one number at market prices and the other one at inflation adjusted prices.

So, effectively, every time the GDP is released, there are 4 different numbers for GDP that are released. If you see the latest release, you will find the following four GDP estimates in the report.

 GDP Criteria Q2 2010 Q2 2011 Growth Rate QUARTERLY ESTIMATES OF GDP AT FACTOR COST IN Q2 (JULY-SEPTEMBER) OF 2011-12 (at 2004-05 prices) 1,148,472 1,227,254 6.9% QUARTERLY ESTIMATES OF GDP AT FACTOR COST IN Q2 (JULY-SEPTEMBER) OF 2011-12(at current prices) 1,685,793 1,955,880 16.0% QUARTERLY ESTIMATES OF EXPENDITURES OF GDP AT MARKET PRICES IN Q2 (JULY-SEPTEMBER) OF 2011-12 (at 2004-05 prices) 1,237,610 1,321,038 6.7% QUARTERLY ESTIMATES OF EXPENDITURES OF GDP AT MARKET PRICES IN Q2 (JULY-SEPTEMBER) OF 2011-12 (at current prices) 1,801,957 2,085,315 15.7%

GDP AT FACTOR COST

If you see the table above, you will see that the first row contains what’s called the GDP at Factor Cost at 2004 – 05 prices, and from the growth rate of 6.9% – you can see that this is the number that is reported in the media.

This number is derived from using the Production approachÂ and this method breaks down the economy into different sectors and then computes the value that has been added in each sector.

For the latest year, this is the table that shows this value.

 Industry GDP Q2 2011 â€“ 12 (Rs. in crore) Agriculture, forestryÂ and fishing 135,789 Mining andÂ quarrying 24,774 Manufacturing 192,849 Electricity, gas andÂ water supply 25,137 Construction 95,489 Trade, hotels,Â transport andÂ communication 342,080 Financing, ins., realÂ est. and businessÂ services 230,627 Community, socialÂ and personal services 180,511 GDP at factor cost 1,227,254

Looking at the data this way is useful to see which sectors of the economy are growing, and which are lagging.

These numbers are at 2004 – 05 base prices which means they have been adjusted for inflation and the same numbers are calculated at current market prices as well, and that’s what’s shown in the second row of the first table.

Expenditures of GDP at Market Prices

The second way of calculating GDP is called the Expenditure Approach and this method aggregates the following things:

1. Household final consumption expenditure (C): This is the expenditure incurred by Indians on consuming goods and services.
2. Government expenditure (G): This is the money spent by the government on its activities.
3. Gross Capital Formation (I): This is the investment that’s taking place in the economy.
4. Exports Less Imports(X): The value of exports minus imports in that time period.

You will see this denoted as: GDP (Y) = C + I + G + X

This is how the latest numbers looked like:

 Item 2011 Q2 Private Final Consumption Expenditure (PFCE) 785,463 Government Final Consumption Expenditure (GFCE) 140,883 Gross Fixed Capital Formation (GFCF) 402,994 Change in Stocks 45,499 Valuables 37,681 Exports 333,947 Less Imports 395,512 Discrepancies -29,918 GDP at market prices 1,321,038

Since GDP is calculated using two different methods – both the numbers are different, and this is true for every time period.

Looking at the data this way shows you which parts of the economy contribute the most.

So, from this table you can see that consumption forms the major part of the Indian economy and that’s the reason we remain relatively insulated when there is a global slowdown. If you saw the numbers for an economy that had a lot more exports than imports then that would be impacted a lot more than India got impacted during the last recession and even now.

That’s what happened in China, and to overcome the slowdown they had from exports they boosted government spending which in turn boosted the GDP growth.

Conclusion

Both sets of numbers are useful to look at, and which number you look at depends on what you are trying to identify. To look at how various industries are doing – GDP at factor cost is useful, and to look at the impact of macro policies – the second table is useful since it shows if investments have slowed down, or the government spending has increased and those type of things.

More significantly, people are looking for trends in these numbers, and the trend has been terrible of late.

I tweeted this out earlier in the day, which I think sums up the situation quite clearly.

“6.9%, 7.7%, 7.8%, 8.3%, 8.9%, 9.3%, 9.4% –> India GDP growth each qtr, last 7 qtrs. Serious downwards slide.”

The slowing growth is not getting enough attention and I hope this slide is halted before it comes close to a point where you’re actually looking at a contraction in the economy.

This post is from the Suggest a Topic page.Â

Kapil Dev Tejwani December 1, 2011 at 11:11 am

Grt explanation Manshu…So we see a slide in terms of factor cost of GDP for the last seven quarters.Don’t really know when this slide might stop…Though the govt is taking anti inflationary measures but still we see inflation going up and up …what reasons do you attribute for the same..Hope this also could be future post…

Manshu December 1, 2011 at 4:50 pm

Food is and has been a key contributor to inflation, then commodity prices have been an upward spiral and the government borrowing has not abated, so at one hand you have RBI increasing rates and on the other hand government is spending and spending which is inflationary.

bemoneyaware December 1, 2011 at 12:18 pm

Great post…you are pushing us into territory of economists..Adding my two cents to discussion.

Why do people/stock market/economists talk of GDP?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country’s economy. Measuring GDP is complicated which is why we leave it to the economists.

GDP represents economic production and growth, has a large impact on nearly everyone within that economy. For example, when the economy is healthy, you will typically see low unemployment and wage increases as businesses demand labor to meet the growing economy. A bad economy usually means lower profits for companies, which in turn means lower stock prices. A significant change in GDP, whether up or down, usually has a significant effect on the stock market.
Ref: Investopedia

The GDP is the ultimate benchmark that measures the expansion and contraction of the national economy. Bankers, investment brokers, and government officials use the GDP to determine such things as interest rates, investment opportunities, and tax rates. Hence as GDP in India is going down everyone is worried.
A general way of calculating GDP can be found at GDP at bemoneyaware.com

Ramamurthy December 1, 2011 at 4:14 pm

Thank you Manshu.
I would like to know what is the source data from which these figures are arrived?
for example a local kirana store keeper buys and sells,say rice. Hope at the end of the day he makes a profit.Does this get reflected in GDP.How does the Central Statistics authority gets this data?
I am questioning the accuracy of the data because every body talks of GDP and whether it is up or down.I maintain if the GDP is down it is not the end of the world which is what some people want us to believe.Yes the GDP according to Govt sources is down.But when I come out of my house in Bangalore I see lot of activity going on.House construtions,children going to schools,people rushing to go to workplaces ,cars,2 and 3 wheelers all in a mad rush.To me this is NOT the end of the world.

Manshu December 1, 2011 at 4:43 pm

They carry out surveys and look at the data from different departments private and public sector, look at labor inputs, taxes paid etc. I’m not familiar with the methodology in depth, but a lot of this is estimation.

You may argue about the exact number and I think it is impossible for us to find out about that but I think the trend is more or less correct. You see that reflect best in company’s profits and their capex plans which are down from the peak before the recession.

Jaywant Patki December 1, 2011 at 5:14 pm

I had purchased L&T Infra Bonds last year. For this year also I want to invest 20k. I just wanted to know if I should go for L&T again this year as it is more well-known company or IDFC to diversify my investment and since both are offering the same ROI. I am not sure about how the ratings of these two companies stands. Also,does it make sense to go for 10k each in both, just to diversify?

Thiyagu April 27, 2012 at 7:21 pm

Hi

I was going through Budget 12-13 Budget at a glance document downloaded from Fin Ministry website.
Also, i was mentioning that, they have mentioned yearly GDP growth of 14% in the document.

As far as my understanding:

(a) GDP for 12-13 is Rs 10159884 Crores (as against Rs 8912179 crores of 2011- 12). The
increase is working 14%

(b) However, Projected GDP growth for 12-13 is around 7% only. But what is this 14%.

(c) Fiscal deficit is 5.1 % of GDP. Here the GDP figure taken for reference is Rs10159884
(Fisc Deficit/GDP = 5.1% => 513590 / 10159884

In nut shell, GDP for 12-13 is given as Rs10159884 (which is 14% over 11-12). For expressing
all items as % of GDP figure taken is Rs 10159884.

Sure, I am missing out something. Clarify, when free, where my understanding is wrong.

I am not able to attach the document I am referring but you can check that document in the below given link.

http://indiabudget.nic.in/glance.asp

Manshu April 28, 2012 at 7:18 pm

There are two types of GDP numbers, real and nominal. Nominal GDP are the numbers on the current value, and the real GDP numbers take into account inflation etc. That’s why you see nominal number growth by 15% and real by only 5% or something along those lines. That’s what you are missing.

bemoneyaware June 6, 2012 at 3:49 am

Expanding on what Manshu said.
Every time any GDP number is released, 2 different numbers for GDP are released, one for the base year prices which currently is 2004-05(Real GDP) , which are inflation adjusted prices and one for the current prices (Nominal GDP) or market price. Base Year keeps on changing. Change of base year from 1999-2000 to 2004-05 happened in 29.1.2010 The reason for periodically changing the base year is to take into account the structural changes which have been take place in the economy and to depict a true picture of the economy.

bemoneyaware June 6, 2012 at 3:52 am

As we know now GDP is the value of all the goods and services produced in a country. But value of good and services changes over period of time due to Inflation. Hence it becomes difficult to compare GDP over period of time. To account for inflation two GDP figures are released one based on current prices called as Nominal GDP and other one based on base-year prices called as Real GDP.

Difference between Real and Nominal GDP with example is explained in my article Understanding GDP

m m bhatia June 1, 2012 at 8:22 pm

thanks

Manshu June 2, 2012 at 6:24 pm

bemoneyaware June 6, 2012 at 3:56 am

Manshu this article was of great help for me in understanding GDP numbers of India. The links to the GDP release was very beneficial. Have dedicated my article Understanding GDP of India
to you. Thanks a lot and keep up the good work.

Manshu June 6, 2012 at 4:19 am

Thanks to you for linking back to it – I appreciate it.

Naresh June 28, 2012 at 3:26 pm

This is a great piece of information and the calculation is quite a complex one. I was just wondering if the figures that we get are very accurate, since many a number of households would have been missed.

Manshu July 1, 2012 at 8:32 pm

Accuracy as a problem as far as any Indian numbers go, and more than the absolute number, the thing to watch out for most things is the direction of the numbers. Is GDP going up or down or is the inflation coming down or up or other things like that.