However, such a move to a chain-based mechanism may be ill-advised for a country like India. As noted by the System of National Accounts (SNA, para 15.43) 2008, “If individual prices and quantities fluctuate so that the relative price and quantity changes occurring in earlier periods are reversed in later periods, chaining will produce worse results than a simple index.” In India, with its highly volatile and monsoon-dependent agricultural sector and its vulnerability to fuel prices, chain linking could lead to distortions when prices or volumes fluctuate.
There are other problems with using the chain-based method in the case of resource-starved countries like India. Chain-linked indices are stated to be computationally difficult, demanding additional resources. The 2008 SNA thus noted that annual chain indices require far greater computing compared to fixed-weighted indices, and should not be attempted without adequate, tailored software.
Besides, such chain indices do not allow for extrapolations back or forward from current values. Such extrapolations are important in order to have comparable data over time.
Thus, while a base year revision is warranted, given that India has not revised it for almost 10 years, we should desist from quick fixes based on advanced-country experiences. We should chart our own course. A fixed base year, revised every five years, still remains India’s best strategy.
(Views are personal)
(tulsi.jayakumar@spjimr.org)
Tulsi Jayakumar | Professor, finance and economics, and Executive Director, Centre for Family Business and Entrepreneurship at Bhavan’s SPJIMR
