India to Change GDP Base Year to 2022-2023 for GDP Calculation

The Indian government is considering a change of the base year for the computation of Gross Domestic Product (GDP). This will be the first revision in over a decade - the last update was done in 2011-12. Let us look at the details of the proposed change.

GDP Calculation in India

Gross Domestic Product (GDP) is a key economic indicator that measures the total value of goods and services produced within a country's borders. In India, GDP is calculated using various methods, including the expenditure approach, production approach, and income approach. Below are key factors that influence GDP:

• Consumption: Household spending on goods and services is a significant driver of GDP growth.
• Investment: Investments in infrastructure, capital goods, and businesses contribute to GDP growth.
• Government Spending: Government expenditure on public services and infrastructure can boost GDP.
• Net Exports: The difference between exports and imports (net exports) affects GDP. A positive net exports figure contributes to growth, while a negative figure can detract from it.

Here are GDP numbers from recent years:

GDP Calculation Formula

Let us look at the two methods to calculate GDP. They use different formulas, but the results are pretty much the same.

Approach 1: Expenditure Approach

• Consumption (C): This includes spending by households, the government, and businesses.  
• Investment (I): This includes spending on capital goods such as machinery and equipment.  
• Government Spending (G): This includes government spending on public services and infrastructure.  
• Net Exports (NX): This is the difference between exports and imports.  

GDP = C + I + G + NX

Approach 2: Income Approach

• Compensation of Employees: This includes wages, salaries, and other employee benefits.  
• Operating Surplus: This is the profit earned by businesses.
• Gross Fixed Capital Formation: The investment in fixed assets, such as machinery and buildings.  
• Net Indirect Taxes: It is the difference between indirect taxes (like GST and excise duty) and subsidies.  

GDP = Compensation of Employees + Operating Surplus + Gross Fixed Capital Formation + Net Indirect Taxes + Net Primary Income from Abroad

Change in GDP Base Year

The government is considering changing the base year for the computation of the GDP to 2022-23, from 2011-12 at present, to reflect an accurate picture of the economy. The Ministry of Statistics and Programme Implementation (MoSPI) is likely to make a suggestion for accepting 2022-23 as a base year for the Advisory Committee on National Accounts Statistics (ACNAS).

The 26-member ACNAS, which was constituted under the Chairmanship of Biswanath Goldar, is expected to complete the exercise by early 2026. The estimates of the new base are likely to be released in February 2026.

To improve GDP calculations, the government is making several adjustments. Outdated items like lanterns and VCRs will be removed from the calculation basket, while modern products like smartwatches, phones, and processed food will be added. Additionally, GST data will be incorporated as a new source of information.

To enhance accuracy, studies are being conducted to update the rates and ratios used in GDP calculations. Furthermore, the government is implementing various measures to strengthen the statistical system, aiming to provide a more comprehensive and accurate picture of the informal sectors of the economy.

Why base year in GDP calculation been changed?

Below are some reasons why the Indian government is considering a change in the base year in GDP calculation:

• Inflationary Effects: Over time, prices of goods and services increase due to inflation. Using an outdated base year can overestimate the real GDP growth, as it doesn't account for the rising prices.  
• Structural Changes: The economy undergoes constant structural changes, with new industries emerging and old ones declining. A new base year helps to reflect these changes more accurately.
• Data Quality: A new base year can provide an opportunity to improve the quality and reliability of the data used in GDP calculations.  
• International Comparison: By using a common base year, it will become easier to compare GDP growth rates across different countries.

Before you go

The proposed shift in the GDP base year in India is a significant step towards improving the accuracy and relevance of economic data. By reflecting the structural changes in the economy and leveraging improved data quality, this change can provide a more reliable picture of India's economic performance and support effective policymaking.