Statistical adjustments in changing the way GDP is calculated are commonplace around the world. They are designed to update national accounts by expanding the economic ‘denominator’, that is the total base from which the economy’s growth and transformation is calculated.
The Denominator Effect
The "denominator effect" occurs when the total GDP (the denominator) is revised to reflect the economy more accurately. By moving the base year, previously unrecorded contributions of digital services, fintech, and green manufacturing in the decade between 2011 and 2022 come into the denominator.
In 2014, Nigeria updated its base year from 1990 to 2010. This calculation update effectively increased Nigeria's GDP estimate by 89% (from $270 billion to $510 billion). It achieved this by adequately weighting "invisible" modern sectors like telecommunications and the thriving "Nollywood" film industry.
Rationale for the Shift
The 2011-12 base had become obsolete. It failed to account for major economic transitions, like the rising share of digital commerce and gig work, as well as the introduction of the GST reforms. The Ministry of Statistics and Programme Implementation (MoSPI), which does these calculations, also decided to bypass the volatile pandemic years (2020-22). Thus 2022-23 was chosen, to reflect a stable period for the economy.
Another reason for the shift was a methodological upgrade to bring calculations in line with global standards. The main reform was the use of the ‘double deflation’ method. It adjusts input costs and output prices separately for inflation, and thus presents a more accurate measure of real value added (RVA), which is the global measure of GDP growth.
Expert Criticisms
Such rebasing is a playoff of various criteria; none is perfect. Economists have pointed out that the rebasing methodology may have some flaws:
- 2022-23 represents a period where corporate profits had recovered, but informal labour and rural wages had not. Setting that as the new baseline could mathematically mask the actual nature of the economy: wage growth may look better in the years after, while lived experiences may differ.
- The methodology made certain assumptions given the lack of certain data; chief among these was that the informal sector (which employs a plurality of Indians) was assumed to grow at the same rate as the organized sector. The consequence: headlines look better (since only the formal economy is counted), while the unorganized economy stagnates.
- Lastly, while the economic base year is 2022-23, it depends on the outdated census of 2011. Statistical methods used to scale sample surveys to the whole population may be flawed.
The Result
India’s nominal GDP (the ‘denominator’) contracted by 3.3-4% after the rebasing. What this means is that the national economy is actually slightly smaller than what it was thought to be. However, as the denominator shrunk while the numerators did not, some key numbers changed purely mathematically. Real GDP growth projections for FY 2025-26 jumped to 7.6%, up from 7.4% under the old series, making growth look rosier than it is. On the other hand, the debt-to-GDP ratio also rose from 56.2% to 58.1%, and the fiscal deficit target increased from 4.36% to 4.51%. These may make the managers of our economy look profligate, but remember that actual borrowing has remained unchanged.
Why is this important?
Rebasing improves vital fiscal metrics such as debt-to-GDP ratios and fiscal deficits. These numbers denote a stronger national capacity to manage debt, which can lead to lower borrowing costs, provided others risks don’t exist. This in turn helps nations to climb global rankings. This is important as India is poised to surpass Japan as the world's fourth-largest economy sooner than later.
However, these shifts must be transparent. Global financial markets need clarity to avoid scepticism. When domestic data gathering and presentation is aligned with international IMF standards, these can lead to higher credit ratings and lower borrowing costs. Else, they can be dismissed as merely cosmetic changes, meant to make the government look good to voters.
