Former chief Economic Adviser Arvind Subramanian has issued a detailed response to questions raised by several economists over his claims that India’s GDP growth has been overestimated by 2.5 percentage points between 2011 and 2016.
In a paper presented at the India Policy Forum in New Delhi, Subramanian begins by arguing that in the period between 2011 and 2016, the Indian economy was hit by a series of shocks which should have negatively impacted economic activity. The collapse in exports, loss of macro economic stability during the last few years of UPA 2 government, the problems of an over-leveraged corporate sector and bruised bank balance sheets, the drought in 2014-15 and demonetisation — all should have severely impacted growth.
But, on the contrary, despite all these shocks GDP growth slipped only marginally from 7.7 per cent to 6.9 per cent. “Is it really possible that these five large adverse shocks had such little impact on GDP growth?” he asks.
Subramanian then proceeds to examine several possible factors that could have possibly offset the impact of these shocks on the economy. First, he argues that the shift to the goods and services tax regime and the implementation of the Insolvency and Bankruptcy Code (IBC) are unlikely to have had an impact on growth as the benefits from these reforms would flow only over the medium term. Second, he also questions the explanation offered by some commentators that the new GDP series captures a rise in productivity.
The former CEA argues that it is difficult to believe that productivity would have accelerated during the last two years of the UPA 2 regime as that period was marked by “acute macro stress and a collapse in policy credibility”. He adds, “It is much more likely that during this difficult period productivity actually collapsed. Further, if indeed productivity had risen, then it would have resulted in higher profits for firms.” But that has not been the case.
On the issue of tax collections, Subramanian notes that while growth of direct taxes dipped from about 22 per cent pre-2011, to around 11.5 per cent post 2011, consistent with the decline in growth, it is difficult to examine indirect taxes to gauge the health of the economy, as the Indian government raised the excise duty on petroleum sharply during this period as global crude oil prices fell.
Much of the problems with the new GDP series, he argues, can be traced to the use of a new database, the MCA21, to estimate formal manufacturing, and the suitability of price deflators used by the CSO. However, the former CEA says that his paper attempted “not to estimate but to cross check and validate CSO figures”, and that the “the most important task is to re-visit the GDP methodology, to see how the problems that seem to have resulted in an overestimation of GDP growth can be addressed.”