what-is-gross-value-added-and-how-is-it-relevant-when-growth-is-announced-in-gdp-terms

Context: As per the National Statistical Organisation(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 GVA?

  • In 2015, in the wake of a comprehensive review of its approach to GDP measurement, India opted to make major changes to bring the whole process into conformity with the United Nations System of National Accounts (SNA) of 2008. 
  • As per the 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. 

Why are the latest GVA numbers attracting attention?

  • Earlier (in February), the NSO announced estimates of national income and expenditure had pegged year-on-year GVA growth rates in the first three quarters at 5.4%, 4.8% and 4.5%, respectively. 
  • The estimates also suggested that manufacturing, construction, electricity and utility services and others were faring at about the same level or better than the comparable year earlier periods. 

However, last month’s estimates saw significant downward revisions in the GVA data pertaining to the first three quarters for five of the eight sectors.

How relevant is the GVA data given that headline growth always refers to GDP?

  • 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. 
  • Also, from a global data standards and uniformity perspective, GVA is an integral and necessary parameter in measuring a nation’s economic performance.
    • Any country which seeks to attract capital and investment from overseas does need to conform to the global best practices in national income accounting.

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

  •  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. 
  • GVA is as susceptible to vulnerabilities from the use of inappropriate or flawed methodologies as any other measure. 
    • In a June 2019 research paper, former Chief Economic Adviser Arvind Subramanian held 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.

Source: https://www.thehindu.com/business/Economy/the-hindu-explains-what-is-gross-value-added-and-how-is-it-relevant-when-growth-is-announced-in-gdp-terms/article31768578.ece