Calculating GDP
With changes in WPI and IIP, along with a stabilised GST, GDP numbers may become more credible, says Pronab Sen
- May 27, 2017,
- Updated Jun 1, 2017 12:56 PM IST
The recent changes in Wholesale Price Index (WPI) and the Index of Industrial Production (IIP) are a significant move towards making the gross domestic product or GDP growth numbers more credible.
While changes in the IIP are normal as in the case of a base change - there are new products and new reporting companies - the bigger change that has taken place conceptually concerns capital goods, where we are now going for work-in-progress valuation. But how effective it will be depends on how well companies understand the concept and whether they maintain their books of account in a manner that will provide a better estimation of the work in progress.
The change in WPI is a little more interesting as indirect taxes have been excluded from the calculation, which brings it closer to the methods used to calculate GDP.
WPI has assumed greater significance in GDP calculation. The reason is that for calculating GDP, you are getting company data from the Ministry of Corporate Affairs (MCA) and all that data is at current prices. So, to convert that to real Gross Value Addition (GVA), you need the WPI as the deflator.
Earlier, you were using IIP, which is a volume index, to calculate the real GDP and then multiplying it by the WPI to get the current price GDP.
The recent changes in Wholesale Price Index (WPI) and the Index of Industrial Production (IIP) are a significant move towards making the gross domestic product or GDP growth numbers more credible.
While changes in the IIP are normal as in the case of a base change - there are new products and new reporting companies - the bigger change that has taken place conceptually concerns capital goods, where we are now going for work-in-progress valuation. But how effective it will be depends on how well companies understand the concept and whether they maintain their books of account in a manner that will provide a better estimation of the work in progress.
The change in WPI is a little more interesting as indirect taxes have been excluded from the calculation, which brings it closer to the methods used to calculate GDP.
WPI has assumed greater significance in GDP calculation. The reason is that for calculating GDP, you are getting company data from the Ministry of Corporate Affairs (MCA) and all that data is at current prices. So, to convert that to real Gross Value Addition (GVA), you need the WPI as the deflator.
Earlier, you were using IIP, which is a volume index, to calculate the real GDP and then multiplying it by the WPI to get the current price GDP.