How the CSO fine-tunes GDP figures

The Central Statistical Organisation, the government agency responsible for keeping track of how the economy is performing, goes through five phases of estimating how much India's GDP amounts to each year.

The first number, called the Advance Estimates, is the rawest but, by virtue of being the first, catches the most attention. Subsequent revisions are referred to as the Revised, Quick, Provisional, and Final, respectively.

Last week, the CSO released its Provisional Estimates for the years 2005-06 and 2006-07, which indicated that the economy had actually done better than previously indicated by the Quick Estimates for both years. In 2005-06, GDP grew by 9.4 per cent, as against the previous estimate of 9 per cent. In 2006-07, it grew by 9.6 per cent, again faster than the previous estimate of 9.4 per cent.

In and of themselves, the revisions should not lead to any fundamental changes in perception about the growth dynamics of the economy.

One major reason for the upward revision in both these years, as well as in preceding ones, is that some of the sectors that have been displaying enormous momentum pose significant challenges to measurement.

Sectors such as financial services and telecom, which have seen both an explosion of overall activity and the emergence of a huge variety of products and  services in recent years, always face the risk of under-estimation as the algorithms used to measure activity in them gradually accommodate these developments.

Given that the growth story in India is so closely related to various new service sector activities, regular upward revisions through successive rounds of estimation are only to be expected, as more data about levels of activity come in from different sectors and their consolidation into the aggregate GDP number is fine-tuned.

This view of the revision is borne out by the CSO's decision to de-compose the  mammoth omnibus services category "Trade, Transport, Hotels and Communication", which itself accounted for more than a quarter of GDP and has been among the fastest-growing segments in recent years, into separate categories of "Trade, Hotels and Restaurants" and "Transport, Storage and Communication", respectively.

Although many of the segments of GDP have seen minor revisions between the two rounds of estimation, it is this break-up and the increased precision that should come with it that has apparently contributed the most to the overall upward revision.

Although the split leads to a downward revision of the first new category, there is a significant upward shift in both years for Transport, Storage and Communication, which is now estimated to have grown by 14.6 per cent and 16.6 per cent in the two years, respectively.

Further contribution comes from the financial sector, with the growth rate for that category having been notched up in both years, but rather significantly in 2006-07 from 10.6 per cent to 13.9 per cent.

This revision has some important, but possibly divergent, implications for the outlook for this and the next year. Clearly, a higher base for 2006-07 indicates a possible downward revision of growth prospects this year. However, if the system is under-estimating activity in some key services sectors, those may be doing better than previously thought and will, therefore, offset deceleration in sectors such as manufacturing.

Ultimately, these revisions do nothing to undermine the Indian economy's strong and positive growth story, for what's a few decimal points between economists and statisticians?