Real Capital Stock Estimation for Industries Using Perpetual Inventory Method: A Methodological Exploration

Abstract

A study of industrial structure and growth, in terms of capital intensity and capital productivity of industries, inevitably encapsulates the requirement and associated challenges of estimation of capital stock time series in real terms. An incorrect (under- or over-) estimation of real capital stock leads to dubious conclusion and, thus, ill-informed policy implications derived from the analysis. The industrial survey database–ASI–reports the time series of capital stocks for industries in nominal (at current prices) terms instead of in real (at constant prices) terms which is more meaningful for the analysis. The choice of correct deflator, consideration of suitable depreciation, discard and revaluation of capital stocks, make real capital stock estimation a matter of disquisition. A plethora of studies addresses these challenges of capital estimation deploying perpetual inventory method. However, the approaches used in the previous studies pose limitations in terms of price deflator selection, consideration of benchmark period for initial capital and choice of depreciation rates and methods. The present study addresses these limitations for the registered Indian manufacturing industries. The result of the present study exhibits a robust approach of real capital stock estimate and an advancement from the existing approaches.