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RBI switches back to GDP scale to measure economy (Relevant for GS prelims and GS Mains Paper III)

Dumps GVA methodology as it cites global best practices
The Reserve Bank switched back to the gross domestic product (GDP)-based measure to offer its growth estimates from the gross value added (GVA) methodology, citing global best practices. The government had started analysing growth estimates using GVA methodology from January 2015 and had also changed the base year to 2018 from January.

Demand perspective
While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP model gives the picture from the consumers’ side or demand perspective.

What is Global trend?
Globally, the performance of most economies is gauged in terms of gross domestic product (GDP). This is also the approach followed by multilateral institutions, international analysts and investors, and primarily they all stick to this  norms because it facilitates easy cross-country comparisons.

Gross Value Addedor GDP (FC)
Gross value added (GVA) is the measure of the value of goods and services produced in an area, industry, or sector of economy.

Relationship to GDP
GVA is linked to GDP, as both are measures of output. The relationship is defined as follows:

GVA + Taxes on products − Subsidies on products = GDP

Why GVA is Calculated?
1. GVA and GDP give a picture of economic activity from producers’ (supply side) and consumers’ (demand side) perspective, respectively, because GVA is the net receipt of the producers and GDP is the expenditure incurred by the consumers.

2. Both these measures need not match and there could be a sharp divergence due to net indirect taxes (NIT = indirect taxes − subsidies), which are counted in GDP calculations (GDP is the sum of GVA and NIT).

3. GVA provides a better measure of economic activity because GDP can record a sharp increase just on account of increased tax collections due to better compliance/coverage and not necessarily due to increase in output.

4. GVA is a better reflection of the productivity of the producers as it excludes the indirect taxes, which could distort the production process.

5. A sector-wise breakdown provided by the GVA measure can better help policymakers to decide which sectors need incentives/stimulus or vice versa.

(Adapted from the Hindu and Background from PrepMate-Cengage Economic Book, Chapter 1 Page-4)

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