Gross Value Added 

#GS3 #Economy 

As per the NSO, real GDP (Gross Domestic Product) in the full fiscal year was estimated to have expanded by 4.2% from a year earlier, the slowest pace of growth in 11 years. 

What is Gross Value Added (GVA)? 

  • As per the United Nations System of National Accounts (SNA), gross value added, is defined as the value of output minus the value of intermediate consumption and is a measure of the contribution to GDP made by an individual producer, industry or sector. 
  • At its simplest it gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used. 
  • GVA can be described as the main entry on the income side of the nation’s accounting balance sheet, and from an economics perspective represents the supply side. 
  • While India had been measuring GVA earlier, it had done so using ‘factor cost’ and GDP at ‘factor cost’ was the main parameter for measuring the country’s overall economic output till the new methodology was adopted. 
  • In the new series, in which the base year was shifted to 2011-12 from the earlier 2004-05, GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP. 

How is it measured?

  • As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity. 
  • The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy. 
  • These are: 1) Agriculture, Forestry and Fishing; 2) Mining and Quarrying; 3) Manufacturing; 4) Electricity, Gas, Water Supply and other Utility Services; 5) Construction; 6) Trade, Hotels, Transport, Communication and Services related to Broadcasting; 7) Financial, Real Estate and Professional Services; 8) Public Administration, Defence and other Services. 

What are the drawbacks in using GVA to measure economic growth? 

  • As with all economic statistics, the accuracy of GVA as a measure of overall national output is heavily dependent on the sourcing of data and the fidelity of the various data sources in capturing the vast labyrinth of activities that constitute a nation’s economic life. 
  • To that extent, GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure. 
  • In a June 2019 research paper titled ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications,’ former Chief Economic Adviser Arvind Subramanian of Harvard University and the Peterson Institute for International Economics posited that the change in methodology and data sources when India switched its base year to 2011-12 had led to a significant overestimation of growth. 
  • Specifically, he argued that the value based approach instead of the earlier volume based tack in GVA estimation had affected the measurement of the formal manufacturing sector and thus distorted the outcome. 
  • The paper triggered much debate and prompted the Ministry of Statistics & Programme Implementation to assert in a response that the Ministry’s GDP estimates were based on “accepted procedures, methodologies and available data and objectively measure the contribution of various sectors in the economy”. 
  • The GVA data is crucial to understand how the various sectors of the real economy are performing. The output or domestic product is essentially a measure of GVA combined with net taxes. 
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