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ShareNEW DELHI/MUMBAI: On December 20, China announced that its economy is, in fact, 17 per cent larger than estimated. That made it potentially the world's fourth largest economy after the US, Japan, and Germany. It is currently in sixth place.
The Chinese revalued their gross domestic product - a key measure of national output - by a hefty $285 billion for 2004 after a census found several unaccounted-for businesses.
India is about to perform the same exercise next month when it revises the base for GDP calculation on January 31. Most economists expect this change to result in an increase in the GDP figure.
Governments periodically revise the GDP base year so that new figures reflect better the underlying changes in the economy. The key question: how much bigger will the Indian economy be as a result? The last time the base was changed (from 1980-81 to 1993-94), the GDP "grew" 9 per cent overnight.
No one's betting that the revision will be as large this time. According to Pronab Sen, principal adviser, Planning Commission, the 9 per cent increase last time was because the 1980s saw huge economic change.
According to the World Bank's world development indicators, India's GDP was $688.7 billion in 2004. Assuming 7 per cent growth in calendar 2005, and taking the rupee-dollar exchange rate as stable, we get a 2005 GDP figure of $738 billion.
But that's before the revision of GDP numbers. If one were to assume a 5 per cent increase following the change in base, India's economy will be larger by around $37 billion - or about $775 billion. By next year, we would be at least an $800 billion economy. At this level our annual per capita income, assuming a population of 1.1 billion, would be about $725.
According to Goldman Sach's BRICs report, Brazil, Russia, India and China (hence, BRICs) are the world's new growth engines. The report, released first in October 2003 and revised earlier this month, had predicted that China could become the world's largest economy in 2041 and India the third largest by 2032 if growth does not falter in the interim. With China revising its GDP by 17 per cent, it is going to become No 1 sooner. India could likewise become No 3 more quickly.
The base year currently used for GDP calculation is 1993-94. This means the numbers are stated in terms of the rupee's value in 1993-94.
It also means that the kinds of businesses and income sources being counted in the GDP relate more to what existed in 1993-94.
The economy, though, hasn't been standing still. Among other things, services, especially IT services, have been growing phenomenally. Even within the broader category of services, there are new kinds of businesses and jobs that aren't being counted correctly. For example, BPOs and call centres didn't exist then. The enormous growth in private security and courier services may also be understated. "The system is not geared towards capturing new activities," says Pronab Sen.
A higher GDP number does not mean we are growing faster. It is just recognition of the ground reality through improved number-crunching. But it could have interesting outcomes. A larger economy means outsiders can see the real size of the market better. So, too, can lenders.
