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07 June, 2020
9 Min Read
Part of: GS-III- Economic DATA (PT-MAINS-PERSONALITY TEST)
Why are the GVA figures in focus now? How is the GVA data relevant when economic growth is announced in GDP terms?
BackGROUND
The National Statistical Office (NSO), on May 29, released its provisional estimates of national income for the financial year 2019-20. As per the NSO, real GDP (Gross Domestic Product) in the full fiscal year was estimated to have expanded by 4.2% from a year earlier, the slowest pace of growth in 11 years. And GDP growth for the January-March quarter was pegged at 3.1%. The release also detailed the estimates of the Gross Value Added, or GVA, at basic prices for the four quarters of 2019 as well as the comparable quarterly data for the two preceding years. Interestingly, the GVA numbers for the first three quarters revealed significant revisions from what the NSO had shared back in February when it had announced estimates for the third quarter. While initial estimates are routinely revised based on the updated availability of information, the extent of these revisions has come into focus since they point to a sharper and more widespread slowdown in economic activity over the course of the last financial year than had been previously revealed.
What is Gross Value Added (GVA)?
In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to its compilation of national accounts and bring the whole process into conformity with the United Nations System of National Accounts (SNA) of 2008 (PT).
The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy. These are:
1) Agriculture, Forestry and Fishing;
2) Mining and Quarrying;
3) Manufacturing;
4) Electricity, Gas, Water Supply and other Utility Services;
5) Construction;
6) Trade, Hotels, Transport, Communication and Services related to Broadcasting;
7) Financial, Real Estate and Professional Services;
8) Public Administration, Defence and other Services.
Why are the latest GVA numbers attracting attention?
In February, the NSO announced estimates of national income and expenditure for the fiscal third quarter along with its second advance estimates of GDP for 2019-20.
Those estimates had pegged year-on-year GVA growth rates in the first three quarters at 5.4%, 4.8% and 4.5%, respectively.
The revisions, however, show two other key sectors in a more positive light. Agriculture’s growth for the first three quarters has been marginally increased while Public Administration too as a category has had its numbers boosted for the second and third quarters. The latter sector’s Q1, Q2 and Q3 growth have been revised from 8.7%, 10.1% and 9.7%, respectively, to 7.7%, 10.9% and 10.9%.
How relevant is the GVA data given that headline growth always refers to GDP?
The GVA data is crucial to understand how the various sectors of the real economy are performing. The output or domestic product is essentially a measure of GVA combined with net taxes. While GDP can be and is also computed as the sum total of the various expenditures incurred in the economy including private consumption spending, government consumption spending and gross fixed capital formation or investment spending, these reflect essentially on the demand conditions in the economy. From a policymaker’s perspective, it is therefore vital to have the GVA data to be able to make policy interventions, where needed. Also, from a global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance, and any country which seeks to attract capital and investment from overseas does need to conform to the global best practices in national income accounting.
What are the drawbacks of using GVA to measure economic growth?
As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources in capturing the vast labyrinth of activities that constitute a nation’s economic life. To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure. In a June 2019 research paper titled ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications,’ former Chief Economic Adviser Arvind Subramanian of Harvard University and the Peterson Institute for International Economics posited that the change in methodology and data sources when India switched its base year to 2011-12 had led to a significant overestimation of growth. Specifically, he argued that the value-based approach instead of the earlier volume-based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome. The paper triggered much debate and prompted the Ministry of Statistics & Programme Implementation to assert in a response that the Ministry’s GDP estimates were based on “accepted procedures, methodologies and available data and objectively measure the contribution of various sectors in the economy”.
Source: TH
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