By Rajiv Shah
Top economist Arvind Subramanian has said that changes brought about by the Government of India in data sources and methodology for estimating the country’s gross domestic product (GDP) since 2011-12 “has led to a significant overestimation of growth”. While official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7 percent, the actual growth may have been 4½ percent, ranging from 3 ½ to 5 ½ percent during the period, he adds.
Though not calculating the years that followed, he writes in a new paper, “there were also substantial upward revisions to estimates” later despite the adverse impact of two major policy actions of the Modi government – demonetization and GST – Subramanian, former chief economic adviser (CEA), Modi government, says.
Thus, in 2017 and 2018, Index of Industrial Production (IIP) manufacturing growth registered positive growth of 3.3 percent and 5.3 percent, respectively, and this became part of the GDP calculation, what is not taken into account was the fact that the “informal sector registered negative growth in these years because of demonetization and GST.”
Worse, he underlines in his 34-page paper, “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications”, published by the Centre for International Development at Harvard University, US, that the Government of India estimates of real Gross Value Added (GVA) growth for the informal sector during this period was “based on and proxied by IIP, which is mostly composed of formal sector firms.”
The top economist, who is currently associated with the Peterson Institute for International Economics and the Harvard University’s Kennedy School of Government, says, this happened despite the fact that “the informal sector accounts for 30 percent of manufacturing GVA and hence about 5 percent of overall GVA.”
Claiming that “this proxy might be reasonable in normal times”, Subramanian says, during a period when major policy actions — demonetization and GST — are taken, this would have “disproportionately” impacted the informal sector.
Author of the Government of India’s annual Economic Surveys, released ahead of the Central Budget during his stint as CEA between 2014 and 2018, he believes, such “growth over-estimates matter not just for reputational reasons but critically for internal policy-making.”
Noting that changes in estimating GDP began under UPA-2 and “were completed by the statisticians and technocrats in late 2014, a few months after the NDA-2 government came into power”, Subramanian says, it is India’s interest to “restore the reputational damage suffered to data generation in India across the board – from GDP to employment to government accounts – not just by conferring statutory independence on the National Statistical Commission, but also appointing people with stellar technical and personal reputations.”
Subramanian wants the Government of India must revisit the “entire methodology and implementation for GDP estimation” by appointing “an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature” by including in it “not just statisticians but also macro-economists and policy practitioners.”
He underlines, “If statistics are sacred enough to require insulation from political pressures, they are perhaps also too important to be left to the statisticians alone. Nothing less than the future of the Indian economy and the lives of 1.4 billion citizens rides on getting numbers and measurement right.”
“If statistics are potentially misleading about the overall health of the economy, they influence the impetus for reform in serious and perverse ways. For example, if India’s GDP growth had been appropriately measured, the urgency to act on the banking system challenges or agriculture or unemployment could have been very different”, the economist adds.
Pointing out that “for every economy, accurate measurement of key indicators, especially GDP growth and its constituents, is critical for credibility and investor and consumer confidence, for sound policy navigation, and for the impetus and incentives it creates for the urgency and nature of reform”, he states, his estimation suggests, “instead of the reported average growth of 6.9 percent between 2011 and 2016, actual growth was more likely to have been between 3 ½ and 5 ½ percent.”
|Annual average growth, selected indicators and GDP, 2001-11 & 2012-18 (%)|
- export (goods and services) growth is 14.5 percent before 2011 and 3.4 percent thereafter;
- for imports (goods and services), the corresponding numbers are 15.6 percent and 2.5 percent, respectively; the behavior of imports in itself provides compelling evidence of mis- measurement because such staggering declines are simply incompatible with stable underlying GDP growth;
- production of commercial vehicles grew at 19.1 percent before 2011 and minus 0.1 percent after 2011; and
- only petroleum consumption and electricity grew marginally faster post-2011 than pre-2011.