GDP is a measure of income, not of output: Pronab Sen

The wide differential in the base years of the national accounts and index of industrial production and the wholesale price index could explain the inconsistency we see between the gross domestic product (GDP) numbers and these indices, says Pronab Sen, chairman, National Statistical Commission. 

On doubts expressed by many over the quarterly GDP numbers, he tells Dilasha Seth economists and experts have found it difficult to accept that GDP captures value added and not output.

Edited excerpts:

Even after a year of the new national account series rollout, each time GDP data comes out we see a furore from economists and experts, raising accuracy concerns. What, according to you, is the underlying cause of these consistent doubts, despite repeated clarification from the Central Statistics Office (CSO) over the methodology?

What people are finding very difficult to reconcile is the fact that there is a distinction between output and value added at constant prices.

Value added is not a measure of output. Everyone confuses GDP to be a measure of output, when it is actually a measure of income.

This is what people have simply not been able to get.

The core issue is that, traditionally, national accounts in India were based on volumes, then converted to values.

That conversion had two steps -- moving from volumes (such as Index of Industrial Production, agri output) to value using the price index, and from value to value added, using the value added figure from the past.

The new system actually reverses this. You get the values and then convert those into constant prices.

CSO has had several sessions with economists and experts to explain the change in methodology but why does that not seem to be working?

Basically, they are not used to this. When they see real GDP, everyone thinks it is production, when it is actually value add.

While the current national accounts series is based on 2011-12, the IIP and WPI have 2004-05 as the base year. Does that matter?

Yes, a lot. The further you get away from the base year, the less reliable is your GDP, where it can result in quite dramatic changes.

But, we do not know the difference yet in terms of numbers. The product basket has widened dramatically and massively.

Does that also explain inconsistency in the GDP with these indices to the extent we're seeing currently?

Yes, that would certainly be one of the reasons. If your economy has diversified, neither your WPI nor your IIP has captured that, as you are basing it on units that existed before 2004-05.

So, if there is greater diversification in the economy, you are totally missing it. The problem of a deflator will become larger and larger.

To know the difference it will make to GDP, we will need to know the extent of divergence between the weights of WPI and IIP.

How would you explain the sharp growth in Q3 (the December quarter) for the financial sector, with most banks showing a muted bottom line, on account of the higher provisioning requirement for bad debts? 

Yes, the weak net profits of banks are on account of provisioning. And, provisioning has nothing to do with value addition and is not captured by the GDP.

If you add back the provisioning, the profits will appear huge, which explains the double-digit growth.

A bank can generate huge amounts of value addition but still be making losses. Just because loan has turned bad doesn’t mean it is not generating income. GDP or value addition captures the operating profit of the bank.

The definition of value added is operating profit plus compensation to employee.

Provisioning comes after operating profit. Operating profit adds how much you are paying to the employees, gross return to capital, then depreciation that gives you the value add.

What is the assessment of the panel chaired by you that is reviewing the new national accounts? It is learnt you have raised serious concerns over the underestimation arising out of an incomplete Annual Survey of Industries (ASI)? 

Yes. Clearly, there is a serious issue on registration of companies. At least 50 per cent of companies are missing from ASI.

It impacts national accounts to a very substantial extent because a lot of estimates that we make depend on ASI. So, if the ASI is flawed, both IIP and the WPI are going to be flawed.

That’s at the heart of the problem. Besides, given the doubts being cast on completeness of ASI, it suggests there might be a whole bunch of non-company units that are also out of the ASI.

While as a country, we are producing a lot more. Companies we will get from (implementation of) the Companies Act but proprietorship and partnership is the issue. 

But, with IIP and investments muted in the third quarter, over 12 per cent gross value added growth for the manufacturing sector, does not seem to reconcile with the reality?

The manufacturing sector has two components. The corporate data is based on advanced filing of companies in stock exchanges, while the non-corporate one is based on IIP, and you take a weighted average of that.

We have to realise that the IIP is on volumes and going from volumes to value added, we need to see distribution of growth between different stages of production, from raw material to finished products. 

For corporates, we use advance filings, giving high growth for the sector and account for 65 per cent of manufacturing.

The International Monetary Fund also reviewed India’s new national accounts series and the methodology. What have they recommended?

They have broadly agreed with what we have done. I believe this has been put up to the advisory committee of national accounts.