- India’s fast-changing economy has left its statistical office scrambling to catch up
- New methods have captured a bigger share of the economy, but may overstate growth
- A faulty deflator may leave monetary policy too tight and the government too relaxed
The Indian government announced in January 2015 that it would start measuring gross domestic product (GDP) using market prices rather than factor prices.
This shift was not a surprise. The United Nations had in 2008 recommended a switch to market prices on the grounds that this was a better way to measure how much value was added in the economy. Crudely speaking, under factor pricing GDP would measure only the input costs of cars produced by a factory, but not the packaging, marketing and other outlays that go into the final product. It had taken India’s Central Statistical Office (CSO) four years of painstaking review and public hearings before deciding to make the shift.
The new GDP calculations revealed a different Indian economy. Most striking was a considerable jump in the country’s growth rate. Under the old factor price methodology, the Indian economy expanded at annual rate of 4.5 percent in 2012-13 and 4.7 percent in 2013-14. These figures jumped to 4.9 percent and 6.6 percent, respectively, under the new method. The data also revealed that the service sector’s share of Indian GDP was eight percentage points smaller than previously believed. While this change did not alter the nominal size of India’s GDP, it produced a major revision in the structure and components of economic growth.