Financial Daily from THE HINDU group of publications
Tuesday, Dec 13, 2005
Columns - Public Policy Note
Challenge of measuring service sector growth
ON NOVEMBER 30, the Central Statistical Organisation (CSO) of the Ministry of Statistics and Programme Implementation released the quarterly estimates of Gross Domestic Product (GDP) for July-September (Q2) of 2005-06, both at constant (1993-94) and current prices. Overall GDP at factor cost at constant (1993-94) prices for Q2 of 2005-06 registered a growth rate of 8 per cent over the corresponding quarter of previous year.
Much of this overall growth was due to the significant growth of trade, hotels, transport and communication (12 per cent); finance, insurance, real estate and business services (9.9 per cent); and community, social and personal services (6.7 per cent) the three groups making up respectively 28 per cent, 14 per cent and 14 per cent (56 per cent in all) of total GDP of the second quarter.
Given the importance of the services sector and its rapid growth, it is useful to learn how the value added of each of the major services is estimated. The Brochure on new series on National Accounts Statistics (base year 1993-94), issued by the Central Statistical Organisation in May 1999, details the revision of the base year of national accounts from 1980-81 to 1993-94. The revision takes account of the suggestions in the 1993 United Nations System of National Accounts and the labour force participation rates of the 1993-94 (50th Round) National Sample Survey (NSS).For the estimation of GDP or value added of a sector such as trade or transport, direct estimation is feasible when one can determine the values of all outputs and material inputs. When such a direct estimation is not feasible, the derivation of the value added is usually based on one of the following routes: 1. estimate the value added per worker from a limited sample and then use the work force to find the total value added, or, 2. take the total wage and salary expense with some adjustments as the value added. The following serve to illustrate the methods followed in the case of National Accounts Statistics.
In respect of trade, hotels and restaurants, the estimates of GDP relating to public sector trading units are based on an analysis of their accounting and budget documents. For private trading activity, independent survey estimates of the value added per worker are used alongside work force estimates to obtain the value added. In the 1993-94 series, separate GDP estimates were made for private organised and private un-organised sub-sectors instead of the sector as a whole, as in the 1980-81 series.
In addition to this improvement in estimation, for the first time, activities relating to lottery sales and services were included in the GDP of the trade sector. As in the case of trade, more updated benchmarks (from the 1988-89 Enterprise Survey) are used for hotels and restaurants. For transport, storage and communication, the estimates of the gross value added per worker were derived from, respectively, the Enterprise Surveys of 1988-89, 1992-93 and 1991-92.
An important inclusion in the banking and insurance sector in the 1993-94 revision is the value added (in the form of operating surplus) of the Issue Department of the RBI "which was some how not included in the 1980-81 series". The revised series incorporates the recommendations of the 1993 NAS on the estimation of the value added of the insurance sector, which estimates output based on the actual premium earned and income from investment of insurance reserve, net of claims due for payment during the accounting period and change in actuarial reserves and reserves for with-profits insurance.
The revised GDP of banking and insurance also includes the value added of the Employee's Provident Fund Organisation (EPFO), which came into being following the enactment of Employee's Provident Fund Act 1952, but not covered in the 1980-81 series.
For real-estate, the value added per worker from the Enterprise Survey 1991-92 and the estimates of work force were used to obtain the GDP estimates. For subsequent years, the working force has been projected using the annual compound growth rate observed between 1987-88 and 1993-94 of the working force, and the value added per worker moved to subsequent years using rural and urban consumer price indices.
The gross value added of `ownership of dwellings' equals the gross rental of the residential census houses less the cost of repairs and maintenance. The 1991 census of residential houses and rent per household, obtained from the results of the Household Consumption Expenditure Survey 1993-94 (50th Round NSS), has been used to estimate the gross rental separately for rural and urban areas. The cost of repair and maintenance of rural and urban sectors has been subtracted from the gross rental, to obtain the estimates of gross value added for the rural and urban areas in the base year (1993-94). For subsequent years the constant price estimates have been obtained by multiplying the rent per household with the projected residential census houses.
The number of 1991 census residential houses in the urban and rural areas is projected to get the estimates for the midyear 1993-94 by applying the average compound growth rates between 1981 and 1991 residential census houses. For subsequent years also the estimates of rural and urban census residential houses have been prepared by using the same average compound growth rates for rural and urban areas separately.
As a final illustration of the sort of methods that go into the GDP estimates of services sectors, consider the educational sector. In education, GDP for the recognised educational institutions under public sector is taken to be equivalent to the Budget Expenditure on salaries and wages of teaching and non-teaching staff of educational services. Estimates for private recognised institutions were derived on the basis of the benchmark data for 1986-87.
For the subsequent years, the GDP of private recognised institutions in 1986-87 is moved by a combined index of estimated work force of private recognised educational institutions and CPI for industrial workers to get the estimates at current prices.
The GDP estimates of unrecognised institutions have been obtained as a product of the value added per worker from the Enterprise Survey 1991-92, and the corresponding working force. The working force estimates for private unrecognised institutions for 1993-94 have been obtained using the growth observed between the two Enterprise Surveys 1983-84 and 1991-92. For subsequent years, the working force estimates have been obtained using the annual compound growth rate observed between 1987-88 and 1993-94. All the above should serve to caution against undue optimism and pessimism simply based on a point rise or fall in the growth rate. The above also underscore the dire need to obtain up-to-date data on work force and independent estimates of the value added. Simply adding up the people in the services is not economic growth unless the services have been shown to have a reasonable demand and are tested on the anvil of real or imputed market price.
A dozen persons carrying files or standing near the car of a civil servant or a CEO add little value and multiplication of a base year value added per worker with a growing work force is, thus, no guarantee that the economy is really growing. It is gratifying to know that the next revision of the National Accounts Statistics is just a few weeks away and will be based on 1999-2000.
One hopes the methodological foundations of measuring the GDP of services will take a forward leap, given the enormity of the changes in the sector over the past 10-12 years.
(The author is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at firstname.lastname@example.org)
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