Model Answer

Introduction

Gross Domestic Product (GDP) measures the economic value of a country’s activities, representing the market value of all goods and services produced in a specific period. In 2015, India overhauled its GDP calculation methodology to align with international standards, enhancing the accuracy and comprehensiveness of economic assessments.

Body

Key Differences in Methodology

1. Change in Base Year
   • Before 2015: The base year for GDP calculation was 2004-05.
   • After 2015: The base year was updated to 2011-12. This change aligns with global practices to more accurately reflect economic conditions.
2. Broadening of Database
   • Before 2015: The manufacturing sector’s performance relied on the Index of Industrial Production (IIP) and the Annual Survey of Industries (ASI), covering around 200,000 companies.
   • After 2015: The methodology expanded to include annual accounts filed with the Ministry of Corporate Affairs (MCA 21), encompassing about 500,000 companies, providing a more comprehensive view of the economy.
3. GDP Calculation Method
   • Before 2015: GDP was calculated at factor cost.
   • After 2015: The calculation shifted to GDP at market price, incorporating product subsidies and taxes. For sector-wise estimation, Gross Value Added (GVA) at basic price is now used, reflecting international practices.
4. Calculation of Labour Income
   • Before 2015: Labour income was uniformly calculated without differentiation.
   • After 2015: The concept of “effective labour input” was introduced, assigning different weights based on the type of labour, such as owners, hired professionals, or helpers.
5. Coverage of Agriculture and Financial Sector
   • Before 2015: Only farm produce was considered for agricultural income.
   • After 2015: The methodology includes value addition from livestock and broader financial sector activities, such as those involving stock brokers and mutual funds, enhancing accuracy in these critical sectors.

Conclusion

The shift in India’s GDP calculation methodology demonstrates a dynamic approach to economic measurement. The updated method is statistically more robust, incorporating a wider array of indicators and factors that respond effectively to contemporary economic changes.