Skip to main content

Govt of India overestimated GDP by 2.5%, must restore reputational damage: Ex-CEA

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.”

Methodological changes

Subramanian, who mysteriously resigned from as CEA of the Narendra Modi government in 2018, says that the over-estimation is the result of “methodological changes” initiated under the UPA-2 “as part of the periodic base revisions to estimating the National Income Accounts (NIA) by using the Ministry of Corporate Affairs’ (MCA) financial accounts for hundreds of thousands of companies.”
Noting that “cumulatively, over five years, the level of GDP might have been overstated by about 9-21 percent”, he says, his estimation is based on an analysis of the data in the period 1991-2015, by posing the question: “How many emerging market countries had attained 7.5 percent growth with India’s combination of investment, export and credit growth?”
Insisting that the answer to this question is a big zero, Subramanian says, “Indeed, countries with performance on those indicators similar to India’s had not even managed average real GDP growth of 5 percent.” He reaches this conclusion on the basis of 17 standard “real” indicators “strongly correlated with GDP growth for the period 2001-2017”.
Annual average growth, selected indicators and GDP, 2001-11 & 2012-18 (%)
The 17 indicators Subramanian identifies are: Electricity consumption, two-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, index of industrial production (manufacturing), index of industrial production (consumer goods), petroleum consumption, cement, steel, overall real credit, real credit to industry, exports of goods and services, and imports of goods and services.
India’s “16 out of 17 indicators are positively correlated with GDP growth before 2011”, says Subramanian, adding, however, “post-2011, 11 out of 17 indicators are negatively correlated with GDP.” Emphasising that the contrast between the two periods is striking, he gives four major examples to prove his point:
  • 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. 
Comments Subramanian, “What do all these results mean for the magnitudes of over-estimation of GDP growth? All the results robustly and consistently point to over-estimation of GDP growth.”
Thus, “Annual average growth of imports of goods and services was 15.7 percent between 2001 and 2011. Between 2011 and 2018, this declined dramatically to 2.5 percent despite the real effective exchange rate having appreciated mildly over this period which should have increased import growth. Such sharp declines in import growth are probably only consistent with large declines of annual real GDP growth.”
Also blaming a key methodological change, the move from establishment-based data from the Annual Survey of Industries (ASI) and Index of Industrial Production (IIP) to financial accounts-based data compiled by the Ministry of Corporate Affairs (MCA) for the over-estimation, Subramanian says, “It apparently enlarged the scope of economic activity that was covered: More than 600,000 companies file MCA data.”
However, states the economist, “There were always doubts about the quality of some of the MCA data relating to shell companies especially in the services sector.” Worse, “The quarterly growth estimates and their first (two) revisions are based on a much smaller set (roughly in the range of 3000-5000) of relatively large companies.”

Comments

Anonymous said…
And he was very much party to it. His wisdom returns to him when he is kicked out of the government. So much for the intellectual integrity of this great man
Anonymous said…
Rewards in Indian state seem so huge that truth comes from only those who are either left out or kicked out by the system. Be it an economist or a journalist like Shourie.
This talent was already at Modi's feet for over 4 years. And perhaps helped the govt in fudging GDP data.

TRENDING

Arrest of Fr Stan Swamy: UN makes public letter seeking explanation from Govt of India

Counterview Desk In a letter to the Government of India (GoI), three senior United Nations (UN) officials – Elina Steinerte, vice-chair of the Working Group on Arbitrary Detention; Mary Lawlor, special rapporteur on the situation of human rights defenders; and Fernand de Varennes, special rapporteur on minority issues – have said that the arrest of veteran activist Father Stan Swamy in October 2020 marks “the escalation of harassment the human rights defender has been subjected to since 2018.”

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

Farm laws 'precursor' to free trade deal envisaged by US corporates to allow GMO

By Rajiv Shah Did the Government of India come up with the three farm laws, first rushed by promulgating ordinances in June 2020, to not just open the country’s agricultural sector to the corporate sector but also as a precursor to comply with the requirements of the United States for a Free Trade Agreement (FTA), as envisaged by the outgoing US president Donald Trump?

Modi govt 'implementing' IMF-envisaged corporate takeover of Indian agriculture

By Bhabani Shankar Nayak* The surge of wealth of Indian billionaires and the Modi-led BJP government’s onslaught on poor, marginalised and farmers continue to grow simultaneously as masses face annihilating pandemic of coronavirus. There is 90 % rise of Indian billionaire’s wealth over last one decade. It is not accidental.

Differing from Ambedkar, Kancha Ilaiah holds a 'different' theory of caste system

By Banavath Aravind* I was introduced to Kancha Ilaiah’s work when I was about 20 years old. He was then in the midst of a controversy for a chapter in his book "Post-Hindu India: A Discourse in Dalit-Bahujan, Socio-Spiritual and Scientific Revolution", which termed the Baniya community as social smugglers. During many of his debates, I had come to notice his undeterred fighting spirit in trying to bring up certain fundamental social issues that were hitherto undiscussed. I eventually came across some of his works and started reading them silently. I’m deliberately stressing upon the word ‘silently’ here, as this was the kind of silence particularly associated with sensitive social issues like caste, religion, etc. But, as I write this essay, I feel silences on sensitive issues should be broken. Ilaiah opened up an entirely new debate that had the vigour and strength to counter the systemic Brahmanism. His methods of research were also novel in terms of going back to the roo

New trend? Riots 'expanded' to new rural areas post-2002 Gujarat carnage: Report

A VHP poster declaring a Gujarat village part of Hindu Rashtra  By Rajiv Shah  Buniyaad, a Gujarat-based civil society organization, engaged in monitoring of communal violence in the state, in a new report, “Peaceful Gujarat: An Illusion or Truth?” has said that a “new trend” has come about in communal violence in the state, where the parts of Gujarat which didn't see communal riots in 2002 are experiencing “regular bouts” of communal violence.

A new fad in India, coding-for-toddlers culture needs to be 'nipped' in the bud

By Aditya Pandey* We are all aware of the dire consequences of subjecting young kids to intense academic pressure from an early age. In India, we have coaching institutes like FIITJEE and Resonance offering programmes for 6th standard kids to prepare them for “NTSE, IJSO, PRMO and other Olympiads”. The duration of these programmes is around 175 hours – hours that could've been spent playing games and making friends instead.

Savarkar 'criminally betrayed' Netaji and his INA by siding with the British rulers

By Shamsul Islam* RSS-BJP rulers of India have been trying to show off as great fans of Netaji. But Indians must know what role ideological parents of today's RSS/BJP played against Netaji and Indian National Army (INA). The Hindu Mahasabha and RSS which always had prominent lawyers on their rolls made no attempt to defend the INA accused at Red Fort trials.

Fr Stan's arrest figures in UK Parliament: Govt says, Indian authorities were 'alerted'

London protest for release of Stan Swamy  By Rajiv Shah Will Father Stan Swamy’s arrest, especially the fact that he is a Christian and a priest, turn out to be major international embarrassment for the Government of India? It may well happen, if a recent debate on a resolution titled “India: Persecution of Minority Groups” in the United Kingdom (UK) Parliament is any indication. While Jesuits have protested Fr Stan's arrest in UK and US, the resolution, adopted in the Parliament, said, “This House has considered the matter of persecution of Muslims, Christians and minority groups in India”.

More than 5,200 Gujarat schools to be closed down, merged, says govt document

RTE Forum, Gujarat, releasing fact-sheet on education By Our Representative A Gujarat government document has revealed that it is planning to close down 5,223 schools in the name of school merger. The document, dated July 20, 201 was released by the Right to Education (RTE) Forum, Gujarat. It shows that the worst-affected districts because of this merger are those which are populated by marginalized communities – especially tribals, Dalits and minorities, said RTE Forum’s Gujarat convener Mujahid Nafees.