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Base year

Base Year: Challenges in Changing the Base Year, Recently Revised Metrics etc.

A base year can be mentioned as a reference year with which the values or statistical results from other years are compared. The index value of the base year is predictably set equal to 100. The base year is reflected to be normal i.e. a year without major economic conflicts or structural changes or a year with a low rise or fewer price variations. The base year of the national accounts is chosen to allow for year-to-year comparisons. It gives hints about changes in purchasing power and allows for the calculation of expansion-changed development gauges. The previous series changed the base from 2004-05 to 2011-12. The base year is a benchmark concerning which the public record figures like total national output (GDP), gross homegrown saving, and gross capital development are determined. Base year prices are considered constant as that structure is the base for comparison of two or more figures. It is allotted the value of 100 as an index. For the given output the market value of the current year GDP is valued at the base year prices and the growth rate is arrived at. It gives the real output (base year prices) which is different from the nominal output (current prices). In this procedure, the increase in the value of GDP due to the rise in inflation of goods and services ” of goods and services is found.

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Challenges in Changing the Base Year:

Continuity:  

  1. Base year revisions and changes in the calculation approach must be accompanied by previous year-based calculations for better exploration. 
  2. Without the back series, it becomes difficult to make significant and significant assessments about the changes (given more seasoned techniques),
  3. However, the back series for the previous base year correction was not delivered, making dependable pattern investigation difficult for some time.

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Stable Referencing: 

  1. If base year changes are carried too often, they can also confuse and make it hard to read economic trends. 
  2. As this will cast a negative light on our investigation of strategy sway, there should be an objective and opinionated rationale for changing base for an extended period for better examination. In any case, the current proposal appears to be a hasty amendment, given that numerous measurements have recently been reexamined.

Recently Revised Metrics: 

  1. The base year was last revised from 2011-12 to 2014-15 for GDP and wholesale price index (WPI) calculations.
  2. The fact is that the calculation method for GDP was drastically changed and the information test was enormously extended to incorporate more organizations. 
  3. For the Index of Industrial Production the proportional weights of sectors and base year were reviewed even more recently, in 2017 (from 2004-05 to 2011-12).  
  4. A new integrated Consumer Price Index (CPI) was also introduced to make it possible for the central bank to move its focus toward pointing to inflation.

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Why in the news?

The Ministry of Statistics and Programme Implementation (MOSPI) is considering shifting the GDP calculation base year from 2011-12 to 2017-18.

Year of Origin

The national accounts’ base year is chosen to allow for inter-year comparisons. It provides information about changes in purchasing power and allows for the calculation of inflation-adjusted growth estimates.

The base was changed from 2004-05 to 2011-12 in the most recent series.

Change Is Required

Accuracy: The change in the base year used to calculate GDP is done in accordance with the global effort to capture economic data accurately.

Globally Aligned: GDP based on 2011-12 did not accurately reflect the current economic situation. The new series will adhere to the United Nations guidelines in the System of National Accounts-2008.

The base year should ideally be changed every five years to reflect the changing economy.

India’s GDP calculation

Gross Domestic Product (GDP) measures economic output from the perspective of consumers. It is the total of private consumption, economic investment, government investment, government spending, and net foreign trade (the difference between exports and imports).

  1. GDP is calculated by adding private consumption, gross investment, government investment, and government spending together (exports-imports).
  2. To better estimate economic activity, the Central Statistics Office (CSO) abandoned GDP at factor cost in 2015 in favour of GDP at market price and the Gross Value Addition (GVA) measure.
  3. GDP at market price = GDP at factor cost + Indirect Taxes – Subsidies.

Gross Value Added (GVA) (GVA)

  1. GVA is a measure of total economic output and income. It computes the rupee value of all goods and services produced in a given year. 
  2. After deducting the costs of inputs and raw materials used in the manufacturing of those goods and services.
  3. It also provides a sector-specific picture, such as the rate of growth in a particular area, industry, or sector of an economy.
  4. According to national accounting, GVA is the sum of a country’s GDP and net of subsidies and taxes in the economy at the macro level.
  5. Gross Value Added (GVA) = GDP + Product Subsidies – Product Taxes The connection between GVA and GDP.
  6. While GVA reflects the state of economic activity from the producers’ or supply side, GDP reflects the state of economic activity from the consumers’ or demand side.
  7. Because of the difference in how net taxes are treated, both measures do not have to match.
  8. GVA is thought to be a more accurate indicator of the economy. GDP does not accurately reflect the real economic situation because a sharp increase in output is only due to higher tax collections, which could be due to better compliance or coverage, rather than the real output situation.
  9. The GVA measure’s sector breakdown assists policymakers in determining which sectors require incentives or stimulus and, as a result, formulate sector-specific policies.
  10. However, GDP is an important metric for conducting cross-country comparisons and comparing the incomes of different economies.

Conclusion

The base year is an important concept in the National Accounting Standards. It provides a comparison of the current and previous states of the economy. A healthy economy requires a proper revision of the base year to understand the changes in the system.

How is the Base Year Determined, and What Are the Consequences?

  1. In 1956, India’s Central Statistical Organization (CSO) (now NSO) published the first estimates of national income, using 1948-49 as the base year.
  2. The technique was modified as data availability improved over time.
  3. Previously, CSO relied on National Census population estimates to determine the workforce of the economy.
  4. As a result, the base year and census year were always the same, such as 1970-71, 1980-81, and so on.
  5. As a result, the CSO determined that the data from the National Sample Survey (NSS) on workforce size were more accurate and that the base year would be changed every five years when the NSS conducted such a survey.
  6. This approach was implemented beginning in 1999 when the base year was changed from 1980-81 to 1993-94.
  7. In January 2015, the government replaced the previous base year of 2004-05 with a new base year of 2011-12 for national accounts.
  8. The economy’s growth rate was predicted to be 6.9 percent in 2013-14, up from 4.7 percent in 2004-05, with the switch to the new base year. Similarly, the growth rate for 2012-13 was increased from 4.5 percent to 5.1 percent.