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Rebasing the GDP

Asjadul Kibria | Published: March 14, 2019 20:38:25 | Updated: March 17, 2019 20:25:37


The government has decided to rebase the country's Gross Domestic Product (GDP) by adopting new base year and also including new sectors. This will be the fourth round of rebasing the national account of the country since independence. Fiscal year 2015-16 (FY16) will be the new base year replacing FY06 and new estimate of GDP will be composed of 21 broad sectors instead of existing 15.  Once into effect, the size of the economy will obviously become bigger and wider than it is now. 

Rebasing the GDP is not a unique thing and many countries do the exercise at intervals of five or 10 years. There are two major rationales to do this. One is to bring more portions of informal economy under formal reporting of national income. The other is to capture budding economic activities into GDP estimation.

A large portion of the economy of a developing country like Bangladesh is under-reported and so not reflected in the official estimation of national income. Informal activities play a big role to generate income for a large segment of the population. Around 85 per cent of the country's employed population is engaged in informal jobs. The number was 51.73 million in FY17.

Bangladesh Bureau of Statistics (BBS), however, defined informal employment as the 'total number of informal jobs, whether carried out in formal sector enterprises, informal sector enterprises, or house-holds.' It means, even people employed in the formal sector may be considered as informally employed if the job doesn't provide any legal and formal contract. But the informal sector 'consists of unregistered and/or small unincorporated private enterprises engaged in the production of goods or services for sale or barter.' This sector 'typically operates on a small scale at a low level of organisation, with little or no division between labour and capital as factors of production' where 'labour relations are based mostly on casual employment, kinship or personal and social relations.'

Even some economic activities like illegal toll taking are also a part of the informal economy. This is popularly known as shady economy or black economy where tax authorities have virtually zero access. Again, some of the activities like household works of women were never considered as contributing to the economy since these do not generate any income per se. But the indirect contribution is significant if estimated in monetary terms. 

Interestingly, there are a few overlaps between formal and informal economics. No matter whether any income generated by a formal or informal activity, consumer spending from the income are mostly subject to indirect taxation like Value Added Tax (VAT). For instance, when a mastan at a city bus terminal collects toll, it is both an illegal and informal earning. When he spends from the earning to buy food and clothes, his spending enters into formal economy by paying indirect tax. So, identifying the scope of informal economy is tricky to some extent. 

Another critical aspect of rebasing the GDP is bringing new and emerging economic activities under the formal national account book. Over the years, many new areas of economic activities have emerged thanks to information technology and innovative ideas of young population of the country. Even five years ago, e-commerce activity was moderate which is now rising. Purchasing through online and home delivery are now quite visible across the country. the business of ride sharing is also booming in Dhaka. There are many other activities which are still not captured in the national income account.

By expanding the coverage of the sectors contributing to the national economy, the size of GDP will increase, and it is not an artificial expansion. Rather, it will update the understated GDP. But to include new sectors appropriately, extensive and updated survey on economic activities be required. The last economic census was conducted in 2013 and the final report was published in 2015. So, another round of national economic census is due now to rightly identity the emerging sectors and also sectors turning obsolete. Without a fresh comprehensive economic census, how the national statistical agency is going to accommodate new areas in GDP estimate may be a matter of review.

In fact, regular census and survey are required to track the different emerging economic activities in the country beside the regular sectors. While it is easy to claim that a number of small but new activities are there now, it is not easy to quantify the claim without adequate statistical survey.  It is also sometimes difficult to know the rapid change taking place within the industry. For example, BBS conducted its last survey on manufacturing industry in 2012 and it needs an update now.

There is no doubt that the capacity and strength of BBS have increased over the years. Adaptation of new technology and digital device will make the things far more easier.

Rebasing the GDP also requires back-calculation of the already released GDP data for at least a decade. Otherwise, it will not be possible to compare in the time series analysis. In the last revision of GDP, which came into effect in FY14 adopting FY06 as new base year, BBS estimated constant and current prices backward to FY96 (1995-96). This allows comparing the annual national accounts at current prices for each of the intervening years up to 2012-13.

It is important to note constant and current prices while estimating GDP size and growth. GDP size and growth rates on current price are always much higher than on constant price. But for fair comparison, constant price is used by all.

Back-calculation is a challenging job and needs to be done with utmost care to avoid any abnormal deviation from existing estimation. The major change that takes place in this process is the size of GDP, not the growth rate. The previous three rounds of revisions of GDP series show that in spite of big upward revisions in the size of GDP, estimates of the annual growth rates in real term have changed little. It thus indicates that economic growth is mostly persistent and the statistical agency captured the growth movement fairly. What is going to happen after finalisation of the time series estimate of GDP on new base year could be known once BBS unveils it formally.

asjadulk@gmail.com

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