India’s New GDP Series 2011-12

India has moved to a new GDP series as of recent years. The Central Statistical Organization, which is in charge of calculating the national income, decided to adopt a new series that is based on the year 2011-12 as opposed to the series that was previously used, which was based on the year 2004-2005. It is possible that one will need to be familiar with a few technical terms such as GVA at basic prices, production tax, product tax, and other such terms in order to understand the changes that have been brought about in the new series, which will be explained below.

GDP

• The total monetary value of all the final goods and services produced within the economic territories of a country in a given year is referred to as the country’s Gross Domestic Product (GDP).
• The gross domestic product, or GDP, can be defined more simply as the sum of the product’s final price multiplied by the quantity of goods (and services) produced (value).
• The gross domestic product can be calculated both at a constant price and at the most recent price level. Calculations based on constant prices are adjusted for inflation to produce real GDP, whereas calculations based on current prices also take inflation into account (nominal GDP).

Additionally, GDP can be calculated based on factor costs and market prices.

Comparing the Factor Cost to the Basic Price and the Market Price

India’s GDP series

• The following equation can be used to illustrate the general connection between factor costs and market prices: factor costs plus indirect taxes minus subsidies equals market price.

The following equation illustrates the connection between basic prices and factor costs: basic prices equal factor costs plus production taxes minus production subsidies.

• The connection between the Basic Price and the Market Price is as follows: The market price is equal to the basic price plus the product tax minus the product subsidy.
• Note that this means that the market price takes into account both the product tax and the production tax, whereas it does not take into account either the product or the production subsidies.
• Basic price: The basic price does not include any subsidies that the producer receives from the government and uses to lower the prices charged to purchasers. However, basic prices do not exclude any taxes on products that the producer receives from the purchaser and passes on to the government (for example, GST or Sales Tax or Services Tax). To put it another way, the basic price is the price that is subsidised but does not include tax.

GVA

• GVA, or gross value added, is calculated by subtracting the value of intermediate consumption from the value of output. 
• The relevance of GVA is as follows: The contribution of both labour and capital to the manufacturing process is represented by the term “value added.”
• The relationship between GDP and GVA is as follows: Consider the situation of a single bottle of orange juice that costs Rs. 30 when purchased from a retail outlet as an illustration. The value for the gross domestic product is Rs.30 because this is the monetary worth of the final output. It is possible to arrive at the same estimate for GDP by also counting the value addition made at intermediate stages.
• GVA is typically determined without taking into account factors such as capital consumption or depreciation.
• The value of the gross domestic product can be calculated by adding the value of taxes on products and subtracting the value of subsidies on products from the sum of the value added for all resident units (GDP).

GDP calculation for the Base Year 2011-12 used in the Indian GDP series

• According to the new GDP series, the GDP at market prices is now considered to be the headline number for GDP.
• Gross Value Added (GVA) at basic prices: Gross Domestic Product (GDP) at market prices is derived from a new quantity known as GVA at basic prices.
• The connection between GVA and GDP is as follows: GDP at market prices is equal to GVA at basic prices plus the difference between product taxes and product subsidies.
• Given the importance of the consumer end: In the past, GDP was previously calculated using the factor cost method, which involved taking into account the prices of the products that were received by producers. The new formula takes into account the prevailing market prices that customers are required to pay.
• Additional information from the manufacturing sector: The revised GDP now includes more detailed information on the activities of businesses and has expanded to include an additional number of manufacturing facilities. Not only the costs of production are taken into account now, but also the expenses of selling and marketing the product.
• Earnings of the government, also known as taxes and subsidies: In the past in India, the amount of revenue received by the government was excluded from the official GDP figure. After deducting the subsidy, the amount of revenue obtained from indirect taxes (such as sales tax and excise duty) is now included in the headline GDP figure. GDP adjusted for changes in market prices.

The effects of the adjustment

• Using the previous definition and the base year of 2004-2005, India’s GDP growth was 4.5 percent in 2012-13 and 4.7 percent in 2013-14. These figures were calculated using the old base year. The new Indian GDP series, on the other hand, estimates that the country’s GDP will grow by 6.9 percent in 2013-14 and 5.1 percent in 2012-13.
• The adoption of this method for calculating GDP has brought the method up to the same standard as those utilised by international organisations such as the IMF and the World Bank, amongst others.

Conclusion

In layman’s terms, the basic price of any commodity is the amount that the producer is able to collect from the consumer for one unit of a product, minus any taxes or subsidies that apply to the product. In other words, the basic price is the amount that the consumer pays for the product.

The Gross Domestic Product can be determined by determining the total value of the output. It is also possible to calculate it as the sum of all the value additions that were made at the various stages in order to get the final output.

GDP calculated using factor costs→ GVA calculated using basic prices → GDP calculated using market prices

The argument against using this method is that it is possible to manipulate the GDP figure by adjusting the distribution of subsidies or by increasing tax rates.