Centre defends methodology after former CEA Arvind Subramanian says GDP figures ‘overstated’

Marco Green
June 12, 2019

Subramanian has deduced that India's economic growth rate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17 due to a change in methodology for calculating GDP.

India objectively measures the contribution of various sectors in the economy and the country's gross domestic product (GDP) estimates are based on accepted procedures and methodologies, the ministry of statistics said in a statement. The effort was desirable, both to expand the data for GDP (Gross Domestic Product) estimation and to move to a methodology more suited for a technologically advancing, dynamic economy, according to him. The new GDP methodology uses corporate data from the ministry of corporate affairs MCA-21 database, which some experts have said is flawed and needs a review. Apart from that, while GDP measurement was calculated via factor costs, it was changed to calculating via market costs. This paper shows that this change has led to a significant overestimation of growth.

Subramanian also plots 17 key indicators that are "typically correlated with GDP growth" for the period 2001-02 to 2017-2018. He said the implication of this is: "Macro-economic policy too tight". Rather than deflate input values by input prices, the new methodology deflated these values by output prices, which could have overstated manufacturing growth.

Subramanian said that the one sector where "mis-measurement seems particularly severe" was manufacturing.

So, what does this mean?

"The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer", he writes. The central bank last week lowered its growth forecast for the 2020 fiscal year to 7% from 7.2%. "In reality, weak job growth and acute financial sector stress may have simply stemmed from modest GDP growth", he writes.

In an article in The Indian Express on Tuesday morning, Subramanian mulls over the consequences of reduced growth during this period. Had the growth been what Arvind's estimates show, policy action could have been a lot different. Now, if real activity is weak, the policy rate should be below the neutral rate instead of exceeding it: "the net difference could have been rates about 150 basis points higher than necessary", he said.

"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". We estimate that actual growth may have been about 4½ percent with a 95 percent confidence interval of 3 ½ -5 ½ percent.

What can be done now?

"Most important, restoring growth must be the key policy objective... Indeed, this revisiting may throw up exciting, new opportunities, such as using the large amounts of transactions-level GST data that is now being generated, to estimate - for the first time in India - expenditure-based estimates of GDP".

This, he believes, can be done by appointing people with stellar technical and personal reputations.

He also says that the entire methodology and implementation for GDP estimation must be revisited by an independent task force, comprising both national and worldwide experts, with impeccable technical credentials and demonstrable stature.

The former CEA asserts that the overestimation is not political.

In 2015, New Delhi changed both the way the government calculates GDP and the base year.

"This finding relates to averages over the 2011-16 period, which encompasses both the UPA-2 and NDA-2 governments". They do not speak of how this average over-estimation may have varied over time within the post-2011 period.

"The non-politicised nature of the changes can be seen from the fact that the new estimates bumped up growth for 2013-14, the previous year of the UPA-2 government".

Other reports by Click Lancashire

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