“Base year” in statistics is the year that serves as a reference point (index = 100) against which later years are compared. When the base year changes, it is called “re-basing”.
“Re-basing” is carried out from time to time for economic indicators such as GDP, the Index of Industrial Production (IIP) or the Consumer Price Index (CPI).
Why rebasing is required:
1.) Outdated weights and relative sizes: The base year determines the “weights” of various sectors/activities in the constant-price series. If the economy has undergone a structural transformation, like in India’s case where services share keeps growing considerably, the weights from the old base year will misrepresent current reality. Re-basing is expected to measure growth better.
2.) New sectors & economic activities need inclusion: Structural change means new kinds of economic activities emerge (like digital services, gig economy, platform services). If the base year is old, these may not be adequately captured or may be missing. Similarly, some old industrial sectors may have become obsolete, and need to be removed/de-weighted.
3.) Real growth vs inflation: The indices like CPI and IIP are used to obtain constant-price (real) numbers, to adjust for inflation. By updating the base year, and reflecting current price structures & sector weights, the separation of volume growth from price growth becomes more accurate.
4.) Better policy relevance and data accuracy: If the economic measurement is too anchored in the past, policies based on that data may be mis-directed. By updating the base year, policymakers get a more accurate picture of which sectors are growing, where jobs are, where investment is needed.
5.) Comparability and credibility: With structural change, comparing data across years becomes less meaningful. Rebasing improves comparability across time.