Higher Investment by Statistical Revision

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The revision of the national accounts statistics (NAS) feat has been achieved by aligning the estimates of capital has many noteworthy features and has made interesting formation by industry with the primary GCF estimation modifications to the macroeconomic numbers. While the by institutional categories, thus eliminating the huge overall GDP estimates and the resultant annual growth discrepancies between the two that existed earlier. The rates have remained broadly the same in both the new result has turned out to be more revealing in that esand old series, there are differences in the sectoral growth timates of capital formation have even doubled in some rates. GDP estimates for agriculture and manufacturing sectors. In the important sectors of agriculture and at current prices for all the six years from 1999-2000 registered manufacturing, the capital formation estito 2004-05 are lower in the new series as compared with mates have been revised upwards by about 50 per cent. the old, while all services sectors have experienced In the absence of details about the methodology emupward revisions. A more substantial upward revision ployed for the industry-wise distribution of the discrephas been made to gross capital formation (GCF). The ancies between the two sets of estimates, it is difficult nature of the revision has raised investment rates and to pass any judgment on this revision, but it should to an extent even domestic savings. GCF at current prices, nevertheless be considered a positive development that as a proportion of GDP, had risen from 25.3 per cent consistency in the NAS estimates has been achieved. in 1999-2000 to 26.3 per cent in 2003-04 in the old series, The most conspicuous and what seems to be an while the same have risen from 26 per cent to 27.2 per inadmissible method adopted is the coverage given to cent in the new series. For the latest year, 2004-05, the a new category of “valuables” in the estimation of capital investment rate has been placed at 30.1 per cent. formation, which is attributed to the recommendations

Considering the sketchy nature of information given, of the 1993 System of National Accounts (SNA) of the it is difficult to make a fuller judgment on the nature United Nations, and which has enhanced the GCF rate of revisions effected. Nevertheless, it can be said that by 1.3 percentage points of GDP (or by Rs 40,146 crore) the revisions have covered a large number of areas. A for 2004-05. The method adopted is patently an incorrect significant factor has been the improved sources of data interpretation of the UN SNA. The UN SNA 1993 had made possible by the many NSSO surveys as also other said that “Valuables are expensive durable goods that survey and study results, which have helped to improve do not deteriorate over time, are not used up in conthe output coverage of many new items in areas such sumption or production, and are acquired primarily as as animal husbandry and others not hitherto covered in stores of value”. It had also said that acquisitions and the production estimates, or some of them not adequately disposition of “valuables” are to be recorded in the covered like computer-related activities in the capital account, not as a component of capital formation.

The UN SNA systematically excludes “acquisitions less disposals of valuables” from the composition of gross fixed assets formation and locates the category after “changes in inventories”. There are a number of other items in the capital account which do not form part of gross capital formation. It has been explicitly recognised that such net acquisitions of “valuables” do not contribute to production nor can there be any imputed earning or rentals for such assets.

If the CSO’s method of including “valuables” as part of GCF is accepted, there ought to be a counterpart in savings to finance such investment. Household saving in India is not directly estimated as the difference between household income and consumption; it is done indirectly with the estimates of saving in the form of financial and physical assets formation without taking account of “valuables”. Hence, net acquisitions of “valuables” get completely ignored in the CSO’s saving estimation procedure, whether now or in the past. This contradicts CSO’s acceptance of the UN SNA thesis that “valuables” ought not to be treated as part of consumption. To be consistent, an equivalent amount of “valuables” has to be added to the estimation of domestic savings, whereupon the savings rate would go up by 1.3 percentage points (or by Rs 40,146 crore) to

30.4 per cent. The consequential “errors and omissions” between the finances for GCF and the unadjusted GCF almost double from Rs 50,310 crore (1.6 per cent of GDP) to Rs 90,456 crore

(2.9 per cent). Overall, both conceptually and from the viewpoint of its operational significance, it thus appears improper to include “acquisitions of valuables” as part of GCF. EPW

Economic and Political Weekly February 11, 2006