India's GDP growth overstated, Former CEA Arvind Subramanian professes

Last Updated: Tue, Jun 11, 2019 17:46 hrs
Arvind Subramanian

Former Chief Economic Adviser to India, Arvind Subramanian, has made a sensational claim that India's GDP growth rate may have been over-stated.

Subramanian, who had been one among key economists and also the Chief Economic Adviser during the years 2014-18, a period when Arun Jaitley presented budget documents made this startling claim in a research paper published by Harvard University.

While India's GDP growth-rate hovered at 7 percent between financial years 2011-12 through 2016-17, Subramanian states that actual growth rate could have been in the range of 3.5 to 5.5 percent.

Subramanian, asserted that the overestimation was not political in nature and that this must be distinguished from recent controversies over a back-casting exercise and "puzzling upward revisions" for recent years.

He says, "A variety of evidence- within India and across countries- suggests that India's GDP growth has been over-stated by about 2.5 percentage points per year in the post-2011 period, with a 95 percent confidence band of 1 percentage point."

His paper investigates various factors and counters the methodologies employed by India's statisticians to estimate real GDP growth. In fact, he says that a change in methodology since 2011-12 had led to overestimation of growth.

Subramanian in his research paper writes on various factors that support the hypothesis that GDP calculations were perhaps not in sync with other factors that he illustrates in his report.

The research paper questions that growth metrics such as real investment, export volume growth, credit-GDP ratio, had fallen even while GDP had reportedly grown. To address that and the question on impact on NIA estimates, Subramanian showed a graph of 17 indicators and showed their correlation to GDP growth between the years 2001-17.

Some of these factors that the former Chief Economic Adviser as reported by him were, "electricity consumption, 2-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."

"These indicators are also chosen because they are produced independently of the CSO. 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."

By plotting the growth of these indicators vis-a-vis that of real GDP growth, Subramanian made the following analysis.

The graph within the research paper as tweeted by Arvind Subramanian.

"First, 16 out of 17 indicators are positively correlated with GDP growth before 2011 (they fall to the right of the purple, vertical line). However, post-2011, 11 out of 17 indicators are negatively correlated with GDP (they fall below the green, horizontal line).

"Second, all the correlations should be distributed around the 45 degree line of equal correlation in the 2-periods; that is, each indicator might have a different structural relationship with GDP growth (and so might be more or less correlated with GDP growth), but the correlation should not vary substantially before vs after 2011-12 unless structural changes have occurred at the same time as the GDP methodology revisions. Instead, we find that 5 out of the 17 indicators are indeed close to the line but 11 out of 16 are below the line, indicating a different correlation between the 2 periods with a substantially lower (or negative) one in the second. In other words, the correlations between most indicators and GDP growth broke down in the post-2011 period."

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Elaborating further, one of the key analytical observations made by Subramanian in his report are four parameters that could function as key growth metrics.

"There could be several such indicators that co-move with growth but for the sake of tractability we restrict ourselves to four: Credit (C), Exports (X), Imports (M), and Electricity consumption (E). These are available for a large sample of countries. They are all not difficult to produce. They are typically produced independently of the statistical agency. For example, credit data is produced by Central Banks, trade data by customs authorities, and electricity data by regulators. And the trade data can typically be cross-checked with data from partner countries."

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GDP related growth has been used as a narrative to show various factors. A higher GDP growth rate implies a growing economy. It also becomes the perfect counter to the debate on growth in jobs, income, and agricultural distress. Such fancy rates also helps media outlets bestow fancy titles such as "fastest growing economy".

"Growth over-estimates matter not just for reputational reasons but critically for internal policymaking," he writes in the paper.

Subramanian also asserts that the absence of trust-worthy numbers misleads the overall health of economy. Providing an example, he says, "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 Indian policy automobile has been navigated with a faulty or even broken speedometer," he adds.

However, that a hypothesis that our GDP growth-rate has been weaker than estimates from statisticians should not dent aspirations. In fact, Subramanian admits in his paper, "The results in the paper suggest that the heady narrative of a guns-blazing India must cede to a more realistic one of an economy growing solidly but not spectacularly."

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Some of the assessments lead Subramanian to seeking better independence and hiring of stellar statisticians.

"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. As we measure, so India will go," he concludes.

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