By Sravya Vemuri
A base year is the first of a series of years in an economic or financial index, which is periodically introduced to keep the data current in a particular index. On 15 February 2018, the government said that it would change the base year to 2017-18 so as to reflect the changes in the economy. However, critics feel that this move is more a part of electoral politics and less of an economic one.
The need for a base year
A base year is a particular year used for a comparison of the levels of a particular economic indicator. An arbitrary level of 100 is selected so that percentage changes, either increasing or decreasing, can be easily depicted. On an average, after every 10 years, there is a minimum change of a four percent rise in the price of goods and therefore, the base year needs to be changed. The International Monetary Fund (IMF) also recommends the inclusion of the base year concept while calculating the national income of an economy. Also, changes in the ways of data compilation, new classification systems and new sources of data need to be factored in.
Incorporating new data sets results in the correction Gross Domestic Product (GDP) levels, which affect a wide range of indicators such as trends in public expenditure, taxes and public sector debt. However, annual growth rates are not impacted significantly. This is because the increase in the size of an economy takes place for all following and preceding years. The change from five percent to 6.9 percent may appear large but these two numbers are with reference to different base years and are pegged at different sets of data.
Base year revision in India
The first national income estimates published in 1956 took Fiscal Year (FY) 1949 as the base year. Since then, there have been seven changes, including the latest one, in which the base year of national accounts was changed from FY 2005 to FY 2012. The government now wants to change it to 2017-18. The Ministry of Statistics and Programme Implementation has proposed to initiate the steps to revise the base years of Gross Domestic Product (GDP), Index of Industrial Production (IIP) and Consumer Price Index (CPI) to accommodate and factor the changes that take place in the economic scenario of the country.
However, analysts have questioned the move of the government, primarily because Demonetisation and the Good and Services Tax (GST) regime have disrupted the economic growth of the country in the year 2017-18. Therefore, ideally, 2018-19 should be taken as the base year. The convention of changing the base year every five years was breached in 2010 when the base year was not revised as it was a drought year.
A political agenda or economic progress?
Selecting 2017-18 as the base year might increase the GDP figures dramatically. This would cast a good impression of the Indian economy on the global landscape but, in the long run, it will affect the economic growth. Plans will be made to accommodate the needs of a rising economy and that would exacerbate the development levels. The government, in recent months, has started to compile the data for the informal sector and employment more accurately.
Also, with GST coming into effect, a new set of data is needed and the government argues that it can be better illustrated when the base year is changed to 2017-18. This might also have a political agenda, as the Lok Sabha elections are approaching. The best way forward is to take the decisions, bearing in mind the long-term impacts of the same.
Featured Image Source: CSIS: Center for Strategic & International Studies on Visual Hunt / CC BY-NC-SA
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