A day after the MoSPI issued a clarification on former Chief Economic Adviser (CEA) Arvind Subramanian’s new research that showed India’s gross domestic product (GDP) growth rates were overestimated, the Economic Advisory Council to the Prime Minister (EAC-PM) Wednesday came out strongly against the report and said it will “examine in detail the estimates … and come out with a point-to-point rebuttal in due course.”
The Council pointed out several flaws in Subramanian’s analysis, arguing that he used questionable proxy indicators and his research did not allow for GDP increases on the basis of productivity gains. A country’s GDP is in nominal terms and any exercise should be on the basis of nominal figures, not real growth rates, the Council said, adding that “any attempt to sensationalise what should be a proper academic debate is not desirable from the point of view of preserving the independence and quality of India’s statistical systems, all of which the former CEA is familiar with.”
The EAC-PM said that the Base Year of India’s income calculations shifted to 2011-12 based on recommendations of several committees and it is wrong to suggest that views of experts have not been taken into account. The change in GDP calculation methodology after shifting to 2011-12 is being argued as one of the reasons for overestimation.
The Council stressed that Subramanian should have certainly raised these issues while “he was working as the CEA, though by his own admission, he has taken time to understand India’s growth numbers and is still unsure.” In a research paper, ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications’ published at Harvard University, the former CEA concluded that India’s growth has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17.
“While official estimates have pegged average annual growth at around 7 per cent during this period, actual GDP growth is likely to have been lower, at around 4.5 per cent,” Subramanian said. His analysis is based on 17 key economic indicators which tend to be highly correlated with GDP growth, but does not include the controversial MCA-21 database that forms an integral part of the CSO’s calculation.
Independent attempt needed to assess methodology
After MoSPI, the EAC-PM has pointed out flaws in former Chief Economic Adviser Arvind Subramanian’s assessment that India’s GDP growth was overestimated over the years. Subramanian’s research paper has generated considerable debate, expectedly, but it will bear fruit after an independent attempt is made to assess the methodology behind counting the economic growth. An accurate understanding of an economy’s growth trajectory is key to relevant policy formulation, as to whether it should be expansionary or not. This debate over growth is crucial in this context.
Subramanian’s paper has led to a raging debate on the growth numbers, with the Centre and the EAC-PM responding to the issue. The government on Tuesday said the GDP estimates are based on “accepted procedures, methodologies and available data and objectively measure the contribution of various sectors in the economy”. The methodology of compilation of macro aggregates has been discussed in detail by a committee comprising experts from academia, National Statistical Commission, Indian Statistical Institute, Reserve Bank of India, Ministries of Finance, Corporate Affairs, Agriculture, NITI Aayog and selected state government, the government clarified.
The Council also questioned Subramanian’s use of cross-country regressions to estimate what India’s GDP should be. Regression analysis is a statistical measurement tool used for estimating relationships among different economic variables. “Using cross-country regressions to estimate GDP is a most unusual exercise, as is the suggestion that any country’s GDP that is off the regression line must be questioned … A country’s GDP is in nominal terms and any exercise should be on the basis of nominal figures, not real growth rates,” it said.
Chandrajit Banerjee, director general, Confederation of Indian Industry, said “The growth estimates shown by the former CEA omits productivity and quality and takes only volume into account. GDP data has to take a more robust and comprehensive approach where all growth drivers are included.” “For instance, agriculture, which is one-sixth of the Indian economy, has not been included in the study while service sector, which accounts for more than 50 per cent of GDP, has been inadequately represented. Specifically, IT and telecom sectors which have been the most dynamic parts of the economy in the recent years have been missed out while many infrastructure sectors like rural roads sector that have posted double-digits growth for several years are missing in the report,” he said.