April 18th, 2011
Econintersect (reported by Sanjeev Kulkarni): The widely held belief is that China grew faster than India in 2010. The numbers usually found are 10.3% for China and 8.6% for India. However, the two countries have different processes for calculating GDP. The IMF has attempted to put both countries on an identical standard and they have reported that when India GDP is calculated by the China formula, the 8.6% goes away and is replaced by 10.4%. So did India actually grow faster than China in 2010? Follow up:
Follow up:Here is how The Times of India described the situation:
On the face of it, China grew by 10.3% last year, comfortably outpacing India's estimate of 8.6%. But the IMF's latest World Economic Outlook released earlier this week says that India grew by 10.4% in 2010. How can that be? Here's how the acclaimed journal crunches the numbers to arrive at the same conclusion. India typically reports its GDP "at factor cost", meaning it adds up all the income earned in the course of producing the country's goods and services. Other countries, including China, typically report their GDP "by expenditure", i.e. by adding up all the spending (including taxes) on domestically produced goodies.
So, says The Economist in a blog post, you have to factor in a couple of things into the Indian GDP: taxes and subsidies. A sales tax adds to the amount you have to spend on a good. A subsidy has the opposite effect. If these taxes and subsidies remained steady as a percentage of output, they would not affect the growth rate of GDP, even if they do affect its level.
In India, net indirect taxes rose from 7.5% of output in 2009 to 9.2% in 2010, boosting the growth rate of GDP by expenditure for that year. So if New Delhi adopts the same metric as other countries to measure its GDP, i.e., by expenditure, it lifts India's growth to 10.36% in 2010. "That's fully 0.06 percentage points faster than China. Jai Hind!" says The Economist.
Editor's note: Correspondent Kulkarni asked a good question in a note that accompanied this report. "Why should taxes be added to GDP?"