Let’s discuss what is the base year and why the government changed it to calculate India’s GDP.

The News

On 2nd December, the Ministry of Statistics & Programme Implementation (MoSPI) announced that it has decided to update the base year for the compilation of Gross Domestic Product (GDP) from 2011-12 currently to 2022-23.

I know it got too technical. But that’s exactly what we are here for. Let’s break it down and understand how it affects our economy.

💡Base Year

Consider the base year as a starting point. Think of it as the year we use to measure and compare economic growth over time. It’s like saying, “Let’s see how much better or worse we are doing compared to this particular year.”

Let me give you an example.

If last year we produced 10 pens worth ₹10 each, the total value of production was ₹100.

But this year, the price went up to ₹11 because of inflation and we produced the same quantity (10 pens). Now because they’re priced at ₹11 each. The total value of production becomes ₹110.

At first glance, it looks like the economy grew by 10% (from ₹100 to ₹110). But in reality, the production didn’t grow—the price did. To avoid this confusion, we use the base year. Instead of using this year’s inflated price of ₹11, we use the base year price of ₹10 to calculate the GDP.

It ‘freezes’ the prices of goods and services in a specific year (currently, 2011-12 in India) so that GDP growth reflects actual changes in production, not price increases, i.e., inflation.

So when we say that India’s GDP has grown by 5.4% in the July-September quarter of the current financial year, even though the base year isn’t mentioned here, it’s working behind the scenes to ensure the comparison is fair and accurate.

Updating Base Year

The GDP data published by the government not only tells us–consumers and businesses how the economy is doing, it also helps policymakers to make key decisions. So if the data does not reflect the true picture, it could have unintended consequences.

For example, sectors like digital services, fintech, renewable energy, and e-commerce have grown rapidly. These industries were not prominent in 2011-12.

Smartphones were just becoming popular, and their contribution to the economy was smaller. By 2022-23, they have become a major part of household consumption and industrial output.

So, over time, as prices, technology, and consumption patterns change, the base year becomes outdated, and it is selected based on recentness, economic normalcy, and relevance.

The previous base year revision was done in 2015, from 2004-05 to 2011-12. Today’s world is quite different from what it was in 2011 and hence an update.

To Conclude

It’s like upgrading the lens through which we view the economy to get a sharper and clearer picture.

This change is likely to reflect the changes in the economy, incorporate modern consumption patterns, account for new price levels, and use better data.