Eight days after former Chief Economic Adviser Arvind Subramanian wrote in The Indian Express about his new research that the country’s growth has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17, the Economic Advisory Council to the Prime Minister Wednesday issued a 12-page note to rebut it.
Rejecting the findings, the contributors of the note Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Virmani wrote: “Having closely read the paper and taking into account all information available until June 19, 2019, the primary contributors of this note reject the author’s methodology, arguments and conclusions in the said paper.”
The note said that while a critique of official GDP estimates must specifically critique coverage or methodology, “the author does neither”.
While Subramanian had said that the motivation of his paper was not political and was focused on technical aspects, the EAC note said, “Given the fact that his paper lacks rigour in terms of specific data sources and description; alternative hypothesis; rationale of equation specifications, use of dummies, and robustness-check diagnostics of estimated equations; and choice of countries in the sample and a specific list; it would not stand the scrutiny of academic or policy research standards.”
It went on to state that Subramanian, in the capacity of Chief Economic Adviser, presided over the army of government economists and statisticians, and is aware of the enormous magnitude and complexity of the exercise to compute GDP of the continent-size highly diverse emerging economy of India. “To consider attempting to approximate GDP of such a country on the basis of some correlations and four variables using simplistic econometric techniques and challenging the existing edifice of data collection is not only demoralising to those dedicated personnel but also technically inappropriate,” it said.
Stating that Subramanian’s paper is not peer-reviewed, it pointed that Subramanian cherry-picked a few indicators and performed a rather unconvincing regression analysis to prove his hypothesis that India’s GDP was over-estimated.
The EAC note states that the former CEA used 17 indicators and a majority of these were taken directly from Centre for Monitoring Indian Economy (CMIE), a private agency that is not a primary source of information but collects it from different sources.
“On a more fundamental basis, the national income accounting framework estimates value addition of different economic activities, and not merely changes in indicators of these activities. It is, therefore, conceptually incorrect to relate levels of GDP to levels of indicators,” the note pointed.
Besides this ‘basic flaw’ the note points that several arguments by the author raise “serious concerns.” It states that while Subramanian does not state the strength of the correlation between these indicators and GDP in the period from 2001-02 to 2016-17, “it is clear if there are other indicators that are more strongly correlated with GDP in either of the two periods he evaluates.”
Pointing that while the indicators suggest a strong link with Industry indicators that contributes around 22% to India’s GDP, the representation of Services (60% of GDP) and agriculture (18% of GDP) is as good as missing. “It is difficult to believe that indicators in the Services sector would not correlate with Indian GDP,” said the note. “Now there are two possibilities that may have persuaded the author to ignore the indicators from Services and Agriculture, a) These indicators don’t exist, b) The author chose to overlook them. In both cases, the analysis with 17 indicators appears incomplete, if not obsolete,” it added.
Besides, Subramanian chose to “overlook the tax data”, said the note.
While Subramanian had said in his report that “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,” the EAC said that tax data are hard numbers and “should be an important indicator of growth”.
It added that “there have been no major changes in tax laws until the end period in the author’s analysis (March 31, 2017). GST was introduced on 1st July 2017. The author’s logic of not using tax data appears to be a convenient argument meant to avoid inconvenient conclusions based on hard facts.”
While the press release said that “EAC note highlights eight clear points with supportive facts and arguments that debunk Subramanian’s paper in entirety,” the note however states that India’s GDP estimation methodology is by no means a perfect exercise and the Ministry of Statistics and Program Implementation is working on multiple aspects to improve the accuracy of economic data”.
It further pointed that India’s GDP estimation methodology is at par with its global standing as a responsible, transparent and well-managed economy. If anything, the weakness of Subramanian’s attempt to suggest that the growth numbers are over-estimated confirms that the estimation process is robust to spurious criticism.
“The new methodology introduced in 2015 is a testament to India’s intent to adopt the most modern global standards to accurately report its economic data,” said the note.
Subramanian, in his paper published by Harvard University, had concluded that between 2011-12 and 2016-17, while official estimates pegged average annual growth at around 7 per cent, actual GDP growth is likely to have been lower, at around 4.5 per cent.