Rebasing of national income

There is some very good news from the Pakistan Bureau of Statistics. Following the exercise of rebasing of the national income from 2005-06 to 2015-16, the Gross National Income (GNI) of Pakistan has increased at current prices by as much as Rs 3106 billion in 2015-16, equivalent to an increase of 11.3 percent. Effectively the annual per capita income has increased by over Rs 14,000.

The PBS has also made new estimates of the GDP for the years, 2016-17 to 2020-21, both at current prices and at constant prices of 2015-16. Prior to the rebasing, the average annual growth rate of the economy over the five-year period, 2015-16 to 2020-21 was 3.2 percent. It has now been estimated at 3.6 percent.

The per capita income in the year, 2019, of Pakistan prior to the first Covid-19 attack was $4,800 in Purchasing Power Parity (PPP) US dollars. It has now risen to $5,342. There is need to recognize that Pakistan is back again to having a per capita income that is higher than that of Bangladesh of $5,180 in 2019. Hopefully, this was not the motivation of the PBS.

There is need to appreciate the primary reason for rebasing of the national income periodically. Over a period of ten years or more there are likely to be significant changes in the economic structure. New activities may emerge while traditional functions may gradually decline. There is need in particular to monitor developments in the size of the informal economy.

Pakistan has been through three major rebasing exercises in the last four decades, starting with the change in the base year of GDP at constant prices from 1959-60 to 1980-81. This has been followed by rebasing from 1980-81 to 1999-2000, 1999-2000 to 2005-06 and now from 2005-06 to 2015-16. The increase in the size of the GDP was 6.4 percent, 19.3 percent and 7.8 percent respectively in the three earlier rebasing exercises.

One of the critical pre-conditions to undertaking a national income rebasing exercise is an Economic Census, to size the different sectors of the economy, especially those of an informal nature. Perhaps the best example of this is the Economic Census which was conducted in the country from April, 2001 to December, 2003. The Census covered 3.249 million establishments/households, where any economic activity was being carried out during the time of enumeration. Earlier, such a Census was carried out in 1988.

Beyond the comprehensive Economic Census, there are periodic and more frequent censuses of activities in particular sectors. These include censuses of agriculture, livestock, agricultural machinery, large-scale manufacturing industries, small and household manufacturing industries, mining and quarrying industries, electricity establishments and so on. These censuses enable the derivation of key input-output ratios and estimation of the growth in particular economic activities.

The fundamental issue with the latest rebasing exercise is that it was not preceded by a national Economic Census. The only major sectoral censuses carried out prior to this exercise were that of Manufacturing Industries in 2015-16 covering establishments employing 10 or more workers, a census of oil and gas exploration companies, electricity establishments and autonomous bodies.

Consequently, the sizing of many sectors has been undertaken on a, more or less, ad-hoc basis by studies. These include a study on agricultural input-output in 2016-17, on small household and manufacturing in 2015, construction survey of 2014-15, survey of private services in 2016-17 and so on. The findings of these studies and surveys have generally not been disseminated publicly by the PBS.

Reliance has also been placed on the findings from periodic surveys like the Household Integrated Economic Survey (HIES) and on secondary data from entities like the Employers and Professional Associations. The trends revealed between different censuses, like the Population Census, have also been used for sizing purposes.

The methodology used in the latest rebasing exercise is clearly more improvised in nature as compared to the 2005-06 exercise. Therefore, the estimates need to be interpreted with a note of caution.

However, the rebasing exercise has included more disaggregation of sectors which should help in getting a better picture of the growth process in the economy. The present transportation, storage and communications sector has been broken up into three sub-sectors, viz., transportation and storage, accommodation and food services and information and communications. Education and health have rightly been given the status of sectors and extracted from the public administration and defense and the community, social and private services sectors respectively. Also, names of some sectors have been changed.

Which are the sectors which have shown bigger increases in size in the rebasing? These sectors are identified in Table 1.

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Table 1
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Sectors with big increase in size in 2015-16
following the Rebasing exercise
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                                                                 (Rs in Billion)
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Share of GDP*                 Increase in Size     % Increase     % Contribution
                              (Rs in Billion)                        to Increase
                                                                          in GDP
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Livestock                          685                17.8                  22.1
Construction                       298                49.6                   9.6
Wholesale and Retail Trade         275                 5.4                   8.8
Transportation,
Storage and Communications         966                27.5                  31.1
Public Admin & Social Security     201                 5.5                   6.6
Other Private Services             436                 8.8                  14.0
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TOTAL OF ABOVE                    3090                20.5                  99.6
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Three sectors which have made the biggest contribution to the increase in the size of the GDP are livestock, transportation, storage and communications and other private services. Following the rebasing exercise, the biggest increase is in the value added by the construction sector of almost 50 percent. Transportation, storage, and communications sector has seen an increase of 28 percent and the livestock sector, 18 percent.

There is need to examine the methodology used in sectors which have made the biggest contributions to the increase in the GDP. The first case is the livestock sector. The PBS recognizes in its methodology statement that there was the problem of the lack of availability of results from a fresh Agriculture/Livestock Census. Yet it has proceeded to increase the size of the sector by almost 18 percent, thereby contributing 22 percent to the rise in the GDP.

Second, the sizing of the transport sector has been done on the basis of special studies. The value added of the sector should have been reduced by the exponential growth in losses of the Railway and PIA. Also, the gross value added of the road transport sector is estimated through number of vehicles provided by the NTRC. Surely, a better approach would have been to link the GVA to the trend in consumption of HSD oil.

The hotel accommodation and food service (restaurants) sub-sector has been estimated through a survey. A fixed growth rate of over 4 percent has been used, based on inter-census growth rate of urban dwellings of 2 or more rooms. Is the PBS suggesting that urban dwellings are the primary source of hotel accommodation? Surely this is not the case. Restaurants, especially at the lower end of the market, are very much in the informal economy and their economic contribution can only be quantified by a census.

Third, the methodology used for sizing of the other private services sector is even more problematic. Inevitably, reliance has been placed on ad-hoc surveys, the results of which have not been published. In addition, information on number of members in different professional associations have been used.

Here again there are large number of private services provided by small establishments or households which are pre-dominantly in the informal economy. Examples include private security agencies, recruitment agents for foreign jobs of unskilled and semi-skilled labor, laundry services, hair cutting and beauty salons, domestic help, franchise services, etc. The employment in this sector exceeds 7 million.

The inevitable conclusion is that the rebasing exercise from 2005-06 to 2015-16 has been ad hoc and somewhat subjective in nature unlike the thorough and objective exercise of rebasing from 1999-2000 to 2005-06. The minimum expectation was that the latest exercise should have been preceded by a national Economic Census of establishments/households engaged in economic activities of the type completed prior to the 2005-06 rebasing along with various sectoral Censuses. Therefore, it is difficult to fully accept the results of the rebasing exercise of 2015-16 and recognize that there may be a significant margin of error in the estimates.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2022