Changes of base-year and Indian GDP growth: an agnostic look

Abstract

Purpose World over, change of base year in the gross domestic product (GDP) is a standard practice of GDP estimation. However, unless a consistent series of GDP is released with respect to the new base for the earlier period, the existence of multiple growth rates creates problems for applied researchers, policymakers and the general public alike. Faced with such a menu of GDP series researchers often try to interpolate a consistent series of GDP. The main purpose of this paper is to analyses the nature of the data generating process of such multiple interpolated series of quarterly growth rates and tries to discern the consistency of such processes. Design/methodology/approach The present paper tries to look into the statistical implications and complications of such interpolated quarterly GDP/growth series in India in terms of three series of GDP, namely, with 1999–2000, 2004–2005 and 2011–2012 as its bases. Findings The analysis reveals that as a result of a change of base year, the nature of the data generating process of the old and new GDP series could undergo changes and experience different breakpoints. While all these conclusions seem to be valid for GDP growth at quarterly intervals, taking the data at annual frequency is less problematic. Practical implications The observation suggests that in most applied work, researchers may not have the luxury of only working with annual data and certain consistency checks will be necessary to check the veracity of the results based on quarterly data with those based on annual data. Second, moving forward it may be useful for the Authorities to make a transition to a chain-based linking method rather than fixed time-period-based bases as is currently done. Originality/value The analysis of Indian GDP in this paper is, perhaps, indicative of the fact that usage of quarterly GDP data is to be handled with caution and it is preferable that any serious empirical analysis uses annual GDP data whenever it is available/feasible. The comparison of GDP growth rates at different frequencies and examining the true nature of the process are quite unique in their contribution towards empirical macroeconomic research.