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What Is Wrong With India’s GDP Numbers?

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The Pulse

What Is Wrong With India’s GDP Numbers?

A recent paper sparked heated debate over the accuracy of India’s GDP growth figures.

What Is Wrong With India’s GDP Numbers?
Credit: Wikimedia Commons/ OgreBot

Both Forbes in 2014 and the International Monetary Fund in 2015 had forecast that India would outpace China in terms of economic growth. The projection came on the back of India’s robust economic growth, with Gross Domestic Product (GDP) growing over 7 percent per year.

However, demonetization and the hastily implemented Goods and Services Tax (GST) had a negative impact on the economy. Most of India’s small- and medium-sized companies are still struggling from the double blow of demonetization and the GST. Today, India is faced with a flailing economy with unemployment at 6.1 percent — the highest rate in the last four decades — and a serious agrarian crisis. Given these widely visible problems, the government’s claim that the economy was still growing at 7 percent raised serious doubts. Some economists questioned the methodology adopted by the Central Statistical office (CSO) in arriving at the GDP number.

Now India’s former Chief Economic Adviser Arvind Subramanian, in a paper published by Harvard University, has claimed that India’s GDP growth estimates from 2011-12 to 2016-17 were exaggerated by 2.5 percentage points. In the paper, titled “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications,” he laid the blame for the error on the methodology adopted for calculating India’s GDP. According to Subramanian, the actual GDP growth between 2011-12 and 2016-17 was only 4.5 percent, not the 7 percent figure released by the government of India.

This paper comes at a time when concerns have been raised in various quarters about the official economic growth numbers of the CSO. Successive governments have been tweaking the numbers to show themselves in good stead. The former CEA’s revelation throws a lot of doubt on the establishment’s credibility, especially the independence of the CSO in determining the GDP numbers.

However, Subramanian’s own methodology in arriving at the 4.5 percent figure has received a lot of flak in India. The Economic Advisory Council to the Prime Minister (EAC-PM) on June 19 rejected the former CEA’s claims regarding overestimated GDP growth after 2011, saying that his analysis is based on “cherry-picking” high-frequency indicators while ignoring data on services, agriculture, and robust tax collection.

In a paper published by the EAC-PM, economists Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh, and Arvind Virmani contended that India’s GDP estimation methodology is appropriate to its global standing as a responsible large economy.

They contended that Subramanian did not include the agricultural sector in arriving at his GDP number, and also criticized his decision to overlook tax data (Subramanian had explained that, in his paper, “we do not use tax indicators because of the major changes in direct and indirect taxes in the post-2011 period which render the tax-to-GDP relationship different and unstable, and hence make the indicators unreliable proxies for GDP growth.”)

Also, the Indian economy is largely unorganized and, therefore, not amenable to statistical representation. The EAC-PM paper argued that models cannot be run without accommodating this informal segment, which accounts for around 45-50 percent of the entire economy.

The EAC-PM also accused Subramanian of blindly trusting data provided by the Center for Monitoring Indian Economy (CMIE), a private agency that aggregates its data rather than serving as a primary source.

The paper concluded by noting that India’s GDP estimation is not a perfect exercise. However, “To consider attempting to approximate GDP of such a country on the basis of some correlations and four variables using simplistic econometric techniques and challenging the existing edifice of data collection is not only demoralizing to that dedicated personnel but also technically inappropriate,” they wrote. The authors warned that Subramanian’s conclusion could send negative signals to investors.

To be fair to Subramanian, he had qualified in his working paper that “the results in the paper are by no means the final word.”

But without going into the merits of the technical arguments presented by either Subramanian or the EAC-PM, one can’t turn a blind eye to the prevailing ground reality. India is facing multidimensional problems like unemployment, an agrarian crisis, a drastic fall in the share of manufacturing, stagnant exports, and growing imports. All of these factors have had an adverse effect on GDP numbers. To top it all, consumer expenditure is also on a decline. There is no denying that the Indian economy has bottomed out.

Whatever the ‘truth’ about India’s GDP, it is hoped that the Modi government recognizes the strains and takes steps to put the economy back on the right track. Otherwise, it will be difficult to achieve Modi’s ambitious target of reaching a $5 trillion economy by 2022.

K.S. Venkatachalam is a freelance journalist and political commentator. His articles on socioeconomic issues have been featured in many international newspapers.