Why are GDP and GVA giving different signs of economic recovery?

Indivajal Dhasmana / New Delhi March 01, 2021

Gross Domestic Product (GDP) and Gross Value Added (GVA) figures in FY21 are giving contradictory signs of economic recovery. Actually this is happening because of the difference in the definition of these two figures.

For example, the second advance estimate projected an 8 percent fall in GDP in FY 2020-21, which is faster than the first advance estimate of 7.7 percent. On the other hand, GVA is now projected to fall by 6.5 percent, which is lower than the earlier advance estimate of 7.2 percent.

Also, while the GDP is projected to fall by 1.1 percent in the fourth quarter, the second advance estimate has projected a 2.5 percent increase in GVA in the same quarter.

This difference is due to a change in the definition of 2015 GDP, which is effective from 2012-13 as per the 2011-12 base year. Subsequently, the old figures were also provided as per the revised basis for 2011-12.

The revised method of GDP has not only changed in the base year, but the method of its calculation has also changed.

Earlier method

Factor cost and market value were used in calculating GDP before 2015. Increase in GDP at constant value was used in factor cost. Factor cost means the total cost incurred on all factors of production, which are used for goods and services. It does not include any tax. If indirect tax is added to it and subsidy is excluded then it will result in GDP at market price. GDP at market price or current price is used to know the size of the economy or to calculate various ratios like fiscal deficit etc.

New method

In 2015, a new method of GDP calculation was accepted from the end of January. Firstly, now every step of value addition is used in the calculation of GDP or GVA, which is calculated on the base price. Base price is what the producer gets from the buyer of goods or services. In other words, it is obtained by deducting the production subsidy from the factor cost and production tax. It does not depend on the actual quantity of production. It does not depend on the actual quantity of production. For example registration fees, land revenue, stamp duty etc. If excise taxes like excise duty, value addition duty, goods and services tax are added to the base price in the GVA and the subsidy is reduced then it brings the GDP figures in a new way.

Now take the GVA figures for the entire 2020-21. It is 124.11 lakh crore rupees. But if Rs 9.97 lakh crore is added to net excise taxes or indirect taxes (excluding tax subsidy), then it is Rs 134.08 lakh crore according to the second advance estimate of GDP. In the first advance estimate, the net indirect tax was Rs 11 lakh crore and hence GDP was slightly higher at Rs 134.40 lakh crore. Apart from this, the GDP for 2019-20 was revised at a fixed price of Rs 145.69 lakh crore in January this year, which was estimated at Rs 145.65 lakh crore. Both these reasons suggest that the contraction of GDP is higher in the second advance estimate than in the first estimate.

If you look at the quarterly estimates, this difference becomes even more because the government had given too much food subsidy due to issues related to Covid and paid the dues of the Food Corporation of India. The government’s revised estimate shows that food subsidy has increased to Rs 4.22 lakh crore, which was kept at Rs 1.15 lakh crore in the budget estimate for 2020-21. The first advance estimate took the budget estimate, while the second advance estimate took the revised estimate.

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