Post GDP shocker, Centre may change base year in quest of robust data

The second-quarter GDP shocker, which showed that the Indian economy contracted at a faster pace than widely anticipated in the July-September quarter this fiscal, has spawned many explanations.

A State Bank of India (SBI) analyst called it a “brief pause” in the India story and an unexpected hiatus while economists at CareEdge Ratings noted that the quantum of deceleration was much sharper than expected.

Per official data, GDP growth in the second quarter (Q2) of fiscal year 2024-25 (FY25) moderated sharply to a seven-quarter low of 5.4 per cent, down from 6.7 per cent in the April-June quarter of FY25and significantly lower than the 8.1 per cent recorded in Q2 of the previous fiscal year.

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Seth clarifies situation

While the government has brushed away concerns on the shocking GDP print, with Ajay Seth, secretary in the Department of Economic Affairs, saying “the numbers are not alarming”, there is much to be done to improve the state of affairs of the economy.

Seth has said the government will act soon.

“In the second half (October-March) we will make sure GDP growth rate will be much better. In fact, some high frequency indicators from October point to this. Also, quarterly estimates will be revised when more data is available,” he said.

Changing base year

One more step the government appears to be considering is a change in the base year for calculating GDP. Currently, the base year is 2011-12 and the new base year being considered is 2022-23.

While the opposition and some economists have flagged this exercise as a face saver to improve GDP growth figures, the general consensus among statisticians is that a timely revision in the base year leads to more robust data and a more accurate picture of the economy.

Several factors are being highlighted for the GDP print coming in at just 5.4 per cent for Q2. SBI pointed towards sluggish growth in industry as the chief reason for the country’s gross output to slow down. CareEdge blamed a prolonged monsoon for dragging down mining and slower construction activities due to poor government spending.

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Better prospects

But economists broadly appeared to agree with Ajay Seth, saying that the second half of the fiscal year should be more optimistic for GDP since rural consumption is expected to pick up due to good crops, despite the urban consumption scenario remaining uncertain.

“We expect GDP growth to pick up in the second half of the year as the government pushes up its capex spending," said Rajani Sinha, chief economist at CareEdge Ratings. "Agricultural production is estimated to be healthy and that should help further bolster rural consumption. Food inflation is also expected to moderate by the fourth quarter and that would be supportive of pick up in consumption. Beyond that urban consumption would be dependent on improvement in the employment scenario and real wage growth."

And SBI said that with 6 per cent real GDP growth in H1 (April-September) FY25, the overall growth for full fiscal would be less than 6.5 per cent.

Justifying new base year

Amid this scare, though, the government has apparently started to work on changing the base year used for calculating GDP to 2022-23 from the current 2011-12. This, officials in the Ministry of Statistics and Programme Implementation (MoSPI) said, is being done to reflect a more accurate picture of the economy.

The likely implementation date of the new base year is sometime in early 2026.

India’s former chief statistician, Pronob Sen, told The Federal that the base year should usually be changed every 10 years.

“As an economic system grows, not all sectors grow at the same rate. Over time, the proportion of sectors in the base year changes. Then, new products are coming to the market, old products are dying out, so the composition of the GDP is changing. By and large, change in base year should be done every 10 years, that is the norm.”

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Other economists agree

Sen dismissed allegations by some opposition parties and economists about talk of base year change usually coinciding with a lower GDP print, saying there was no evidence to support these claims.

Madan Sabnavis, chief economist at the Bank of Baroda, wants the base year change to be even faster. “Changing base year and composition of any index is necessary given the changing patterns in society. The pace of change warrants one to reconsider them every five years. Unfortunately, due to the pandemic, getting the right base year is a challenge.”

But with the national census getting delayed -- India conducts the census at the turn of every decade -- does revision of base year suffice for robust GDP data? Sen said the census provides data for accurate GDP calculations but national level data from the Registrar General of India can also be used to calculate GDP.

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Axe outdated items

And brokerage ICICI Direct said in a note that the government will be making several adjustments alongside the new base year. “Outdated items like lanterns and VCRs will be removed from the calculation basket, while modern products like smartwatches, phones and processed food will be added. Additionally, GST data will be incorporated as a new source of information,” it said.

The brokerage also said that real GDP growth can be overestimated if the base year for calculating it is not revised periodically. “Over time, prices of goods and services increase due to inflation. Using an outdated base year can overestimate the real GDP growth as it doesn’t account for the rising prices.”