Resolving the base year conundrum

India’s GDP was ₹98 lakh crore in FY14 and it icreased to ₹139.9 lakh crore in FY19, a rise of ₹41.9 lakh crore.

In FY24, on the back of three successive years of high growth rates of 9.4 per cent, 6.7 per cent and 8.2 per cent respectively in FY22, FY23 and FY24, GDP touched ₹173.8 lakh crore. This is an increase of ₹33.9 lakh crore in the quinquennium which is lower than that in the previous quinquennium.

But this comparison may be not be appropriate due to Covid’s impact on the economy. But there have been substantial swings in growth numbers. This made the base effects more distinct; and it is not surprising that often ‘the base effect’ argument has been used to justify or explain economic numbers involving growth. But the main takeaway is that the Indian economy has still not fully recovered post Covid and there is some distance to cover.

Under these circumstances, the choice of ‘base year’ for economic variables post Covid is fraught with biases which can be upward or downward. Two issues are important while choosing a base year.

The first is that it needs to be a normal year. Has there been a normal year post Covid as almost all interpretations are based on pent up demand phenomenon and its subsequent plateauing?

Similarly the Ukraine war caused substantial disruption to the global supply chains and China’s policies of lockdown and opening up further caused disequilibrium. Therefore, all the years have some shock element embedded.

Structural changes

The second is that the period chosen has to be contemporary. The idea of moving from 2011-12 base year is that there have been sea changes in the structure of the economy with new activities in manufacturing and services gaining in importance with some others getting outdated.

Consumption patterns have changed a lot with changing preferences. Therefore recalibrating the structure of the economy is important. This holds for GDP, industrial production, exports as well as prices. Similarly with substantial formalization of the economy due to GST in particular, there is more accurate data being captured by the statistical organizations.

Choosing a base year under these circumstances is challenging. Any year chosen post Covid would be contemporary but would face inherent biases due to the way in which numbers are presented.

On the other hand, choosing a year before Covid (say 2018-19), would be normal, would have the problem of being outdated and not reflecting the structure of the economy accurately.

There seems to be a growing consensus over using 2022-23 as base year. This should ideally be the year for reckoning all indices in the country. While this should cover the economic variables brought out by the NSO, there would be a justification for also recalibrating other market indices.

The accompanying table provides data on some of the leading indicators that would be impacted by the change in base year. Growth rates in the last three years have been provided along with a comment on likely bias that could come in.

If one looks at GDP growth, future growth rates are likely to have an upward bias because of a relatively lower base. As growth in the last five years has been dented by Covid, as the economy is still recovering, using FY23 as the base year can lead to numbers getting an upward bias.

In case of inflation, both CPI and WPI, the rates have been very high in the last three years. Now by using 2022-23 as the cut-off, the base would start off high and hence the subsequent inflation numbers would tend to be lower. Petro product prices are a case in evidence.

On an average petrol price was ₹109/litre in Mumbai which came down to ₹106 in 2023-24. However, prices before 2022-23 were less than ₹100.

In fact, in 2018-19 the price was just ₹82. 2018-19 was probably the last normal year for the economy, free of any biases.

Economic indicators

The indices for industrial production however, appear to be better balanced with 2022-23 as base year given how the 2023-24 growth rate was in sync with the preceding year. Hence for IIP as well as core sector growth, there would be a lower chance of any bias creeping in.

Trade indices on the other hand tend to come into the picture when reckoning with GDP growth on the expenditure side. Here clearly there will be an upward bias. FY23 recorded low growth on the back of a biased high growth in FY22. FY23 was not a good year for trade which started off on a wrong note with the Ukraine-Russia war. With this low base, the subsequent numbers will tend to be impressive.

So choosing an appropriate base year is not an easy task. 2018-19 could be an ideal base year, given that it was a largely normal year with few disruptions at the global and domestic levels.

But 2018-19 is still a good six years behind the current fiscal. These six years have seen a phenomenal rise in use of technology. E-commerce has grown manifold and become a part of everyday life. Global trade relations have changed significantly causing disruption in supply chains. Within the country, the progressive free food scheme has actually left more money in the hands of consumers to spend more which has provided a boost to both manufacturing and services. Therefore there is merit in using a more recent year.

It would be interesting to see how the final numbers for these indicators would look once the new base of 2022-23 is used. Providing a back series would be useful to get a better view of the past as well as validate past trends.

The writer is Chief Economist, Bank of Baroda. Views are personal