How the CSO fine-tunes GDP figures

[K.Karthik Raja]

How the CSO fine-tunes GDP figures

The Central Statistical Organisation, the government agency
responsible for keeping track of how the economy is performing, goes
through five phases of estimating how much India's GDP amounts to each
year.

The first number, called the Advance Estimates, is the rawest but, by
virtue of being the first, catches the most attention. Subsequent
revisions are referred to as the Revised, Quick, Provisional, and
Final, respectively.

Last week, the CSO released its Provisional Estimates for the years
2005-06 and 2006-07, which indicated that the economy had actually
done better than previously indicated by the Quick Estimates for both
years. In 2005-06, GDP grew by 9.4 per cent, as against the previous
estimate of 9 per cent. In 2006-07, it grew by 9.6 per cent, again
faster than the previous estimate of 9.4 per cent.
In and of themselves, the revisions should not lead to any fundamental
changes in perception about the growth dynamics of the economy.

One major reason for the upward revision in both these years, as well
as in preceding ones, is that some of the sectors that have been
displaying enormous momentum pose significant challenges to
measurement.

Sectors such as financial services and telecom, which have seen both
an explosion of overall activity and the emergence of a huge variety
of products and services in recent years, always face the risk of
under-estimation as the algorithms used to measure activity in them
gradually accommodate these developments.

Given that the growth story in India is so closely related to various
new service sector activities, regular upward revisions through
successive rounds of estimation are only to be expected, as more data
about levels of activity come in from different sectors and their
consolidation into the aggregate GDP number is fine-tuned.

This view of the revision is borne out by the CSO's decision to de-
compose the mammoth omnibus services category "Trade, Transport,
Hotels and Communication", which itself accounted for more than a
quarter of GDP and has been among the fastest-growing segments in
recent years, into separate categories of "Trade, Hotels and
Restaurants" and "Transport, Storage and Communication",
respectively.

Although many of the segments of GDP have seen minor revisions between
the two rounds of estimation, it is this break-up and the increased
precision that should come with it that has apparently contributed the
most to the overall upward revision.

Although the split leads to a downward revision of the first new
category, there is a significant upward shift in both years for
Transport, Storage and Communication, which is now estimated to have
grown by 14.6 per cent and 16.6 per cent in the two years,
respectively.

Further contribution comes from the financial sector, with the growth
rate for that category having been notched up in both years, but
rather significantly in 2006-07 from 10.6 per cent to 13.9 per cent.

This revision has some important, but possibly divergent, implications
for the outlook for this and the next year. Clearly, a higher base for
2006-07 indicates a possible downward revision of growth prospects
this year. However, if the system is under-estimating activity in some
key services sectors, those may be doing better than previously
thought and will, therefore, offset deceleration in sectors such as
manufacturing.