Changes in GDP Data can Impact Borrowing Limits, Allocations

Chennai: The GDP data based on a revised base year, which is set to be released this week, can potentially impact on state borrowing limits under fiscal responsibility laws and alter central fund allocations, if there are significant changes.

If there are significant changes in the GDP data, there could be issues in the allocation of funds to the states, said J B Mohapatra, former chairman of Central Board of Direct Taxes. India is revising the base year for calculating Gross Domestic Product (GDP) from 2011-12 to 2022-23.

“In the allocation of funds to the states there could be issues. the comparatively poorer states that demarcation lines if they are blurred or if they change drastically then the central allocation to the states also may be reallocated or there is a chance there is a potential of reallocation of the central allocation to the states in some manner the central grants etc,” he said.

“Suppose a state’s GSDP changes, its borrowing powers under the FRBM also will change. The GDP change will trigger many changes not just in budget estimates, but in many other areas and those areas we do not know for sure at this point in time what could be the areas which will get impacted,” he added.

The upcoming revision follows global best practices and recommendations from international bodies, including the IMF, which has pointed to weaknesses in India’s data coverage despite improvements in timeliness and granularity. A major focus of the new series will be better capturing the informal sector, long considered a blind spot in GDP estimation.

Previously, informal sector output was extrapolated using benchmark indicators and growth proxies drawn from the formal sector. Mohapatra noted that this approach was problematic, as the informal economy reacts very differently to shocks such as demonetisation, GST implementation, or the pandemic. Productivity assumptions from 2011 were often extended forward, potentially distorting estimates.

The new methodology proposes using the Annual Survey of Unincorporated Sector Enterprises (ASUSE) alongside the Periodic Labour Force Survey (PLFS) to construct a more realistic estimate of gross value added in the informal economy. Improved deflators potentially moving beyond the commodity-heavy Wholesale Price Index (WPI) and stricter adherence to supply-use tables are also expected to reduce discrepancies between the production and expenditure methods of GDP calculation.

Mohapatra argued that greater formalisation of the economy, combined with better use of government-backed databases such as GSTN, income tax records, and public financial management systems, can significantly strengthen data quality. As India’s data systems grow more sophisticated, he said, GDP estimates will become more credible supporting stronger, evidence-based policymaking.