CHANGE OF BASE YEAR - A GOOD MOVE!

By Ruma Dubey

For most of us ignoramus, the Base year in economic parlance does not mean much; or rather does not mean anything. But today, when we base all our economic data for making important investment decisions, take a calculated risk even on what the RBI could announce, this base rate holds tremendous significance.

Last week, after 2010, the Govt changed the base year – from 2004-05 to 2011-12. This change immediately affects the GDP estimates. The Central Statistics Office (CSO) which releases the second Revised Estimate for a financial year ending in March on the subsequent January 30 every year, this year too revised the FY14 GDP estimate.

As per the latest estimate now, the FY14 GDP growth, using 2011-12 as the base year has been revised upwards from 4.7% to 6.9% and the FY13 GDP estimate has been revised to 5.1% from 4.5%.

This represents a more realistic picture as the changed base year reflects a more current economic scenario of macro aggregates, taking into account the structural changes that have taken place. And this change happens often though the gap was 10 years in recent times, the longest ever from 1993-94 as base year in Feb’1999 it was changed only in 2006 to 2004-05.

The base year is changed by National Accounts Statistics. It was first changed from 1948-49 to 1960-61 in August 1967; from 1960-61 to 1970-71 in January 1978; from 1970-71 to 1980-81 in February 1988; and from 1980-81 to 1993-94 in February 1999; then in 2006 to 2004-05 and now to 2011-12.

This time around, apart from the change in base year, there is a change in the methodology too, which is as per what the IMF has prescribed. Henceforth growth will be measured by gross value-added at basic prices unlike factor cost, which was the method used till now. In simple language what this means is that data is compiled on market or current prices and that makes all the difference. This apart, more sectors have been covered, labour activities have also been revised; the unorganized as well as the organized sector activity is being taken into account.

The Govt will also be revising the base year for consumer price index (CPI), wholesale price index (WPI) and index of industrial production (IIP) and is likely to be released by March 2016. These new series of numbers will be used to make provisional estimates for 2014-15. This will be released in May 2016.

These changes, especially because of use of market prices, will necessarily mean that we will get higher GDP growth estimates but more importantly, it will be more comprehensive, more scientific. It might not be accurate but it is as close as we can get. And that in itself is a good thing. After all, it is these numbers which RBI also uses to make all important economic decisions.

Well, for the ignoramus, it is enough to know that this change in the base year is a good thing!