Proposal for city-level GDP under study

The News

  • The Centre has proposed to bring out city-level GDP data.

 

Background

  • The Economist Intelligence Unit (EIU) was commissioned by India’s Ministry of Housing and Urban Affairs (MoHUA) to evaluate methodologies for calculating city-level gross domestic product (GDP) and to assess their applicability to India.
  • The EIU conducted a review of several approaches undertaken by other government organisations and think-tanks to estimate city-level GDP.
  • The report of a feasibility study of various models to calculate city-level GDPs for the MoHUA was released earlier this week.
  • By the end of September 2018, the ministry will take a final call on the feasibility of the project, and decide what approach to use.
  • If the project is approved, the process to calculate GDP for a pilot city is likely to begin by the end of the year.

 

About the feasibility report of city-level GDP

  • The Economist Intelligence Unit (EIU) conducted a high-level review of some of the estimation methodologies used for calculating either city-level GDP or regional GDP.
  • Based on review and stakeholder engagement, The EIU identified a top-down approach based on sectoral income data for consideration.
  • It believed that the top-down approach using sectoral income data is the preferable approach in the longer term because it balances detail and resource-effectiveness.
  • The EIU also reviewed top-down approaches that use population and employment as weights; however, an approach using sectoral income data is more likely to capture urban wealth and city-specific economic structures.
  • In the short term, a top-down approach using household expenditure data could be a more feasible alternative as it has fewer data requirements, but it is less robust and does not capture specific city characteristics.
  • Bottom-up approaches are extremely data-intensive and were not put forward for consideration due to concerns about feasibility and the diversion of resources from existing initiatives designed to improve the overall statistical framework in India.
  • Bottom-up approaches are also rarely used by statistical agencies globally for city-level GDP estimates.

 

About GDP and its measurement

  • GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.
  • It can be measured by three methods, namely,
    • Output Method: This measures the monetary or market value of all the goods and services produced within the borders of the country. GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.
    • Expenditure Method:This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM) C: Consumption expenditure, I: Investment expenditure, G: Government spending and (X-IM): Exports minus imports, that is, net exports.
    • Income Method: It measures the total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country. GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.
  • In India, contributions to GDP are mainly divided into 3 broad sectors – agriculture and allied services, industry and service sector.
  • In India, GDP is measured as market prices and the base year for computation is 2011-12.

 

Importance of GDP

  • GDP growth rate is an important indicator of the economic performance of a country.
  • The GDP impacts personal finance, investments, and job growth.
  • Investors look at the growth rate to decide if they should adjust their asset allocation.
  • They also compare country growth rates to decide where the best opportunities are.
  • Most investors like to purchase sharesof companies that are in rapidly growing countries.
  • We can also use the GDP report to look at which sectors of the economy are growing and which are declining.

 

Need of City-level GDP calculation

  • National GDP is a well-established process, but we have so far not had city-level GDP in India.
  • With urban India responsible for an increasingly large share of the national GDP, the Centre now hopes to bring out city-level GDP data.
  • The urban sector is likely to account for 75% of India’s GDP by 2020.
  • This is a sharp spike from 1951, when the urban sector only accounted for 29% of the national GDP. By 1981, it was 45%, and by 2011, it had crossed the 60% mark.
  • A recent study by Brookings Institution found that several Indian cities rank in the 300 global cities with the fastest GDP growth rate.
  • Its Global Metro Monitor report, released in June 2018, estimated that Hyderabad’s GDP was growing at 8.7%, followed by Surat at 7.9%, comparable to that of the fastest growing Chinese cities that dominate the list.
  • When we talk about Smart Cities, there are three main components: an improved quality of life, a robust economy leading to job creation, and sustainability built into every aspect.
  • But we cannot improve those indicators if we cannot measure them and hence, the centre has proposed measurement of city wise GDP, so that a targeted effort can be made for their development.
  • However, there is currently no reliable quantification of the magnitude of the economic output of Indian cities.

 

Significance of City-level GDP data

  • A city-level GDP calculation would help give shape to the economic indicators needed.
  • The decision could help both cities and investors make wise decisions, and also help municipal bodies raise funds for their own infrastructure needs.
  • It can help cement the centrality of Indian cities to the economic growth story with state-level policy makers and the broader electorate.
  • In doing so, it can bolster the case for reforms that are critical for cities to deliver on their economic potential such as greater devolution of power, finances and trained personnel to city governments.
  • The different measures of GDP are great tools for comparing the development of other cities as well as how a city’s economy changes over time.

 

About the EIU

  • The Economist Intelligence Unit (The EIU) is the research and analysis division of The Economist Group, the sister company to The Economist newspaper.
  • Created in 1946, it has over 70 years’ experience in helping businesses, financial firms and governments to understand how the world is changing and how that creates opportunities to be seized and risks to be managed.

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