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Wednesday, May 18, 2022

GDP and its assumptions

New GDP back series does what the government needs it to — shows that growth during its term has been higher than during the UPA regime.

Written by Arun Kumar |
Updated: December 21, 2018 12:45:30 am
The Niti Aayog vice chairman has defended the official new series on grounds that it follows the System of National Accounts (SNA) 2008, recommended by the United Nations and so on. The Niti Aayog vice chairman has defended the official new series on grounds that it follows the System of National Accounts (SNA) 2008, recommended by the United Nations and so on.

Controversy over the growth performance of the Indian economy took another turn with The Indian Express breaking the story about Niti Aayog not allowing the back series to be announced three years back because it showed a higher growth rate during the UPA regime. The suspicion that the new official series announced recently was politically manipulated to show better performance for the NDA compared to the UPA is strengthened. The Niti Aayog vice chairman has defended the official new series on grounds that it follows the System of National Accounts (SNA) 2008, recommended by the United Nations and so on.

However, his argument that the sub-group of the Statistical Commission which released the earlier back series in July 2018 was not authorised to prepare a back series and, therefore, “there was no question of the government accepting it” is odd. The vice-chairperson undermines the credibility of a government committee and, in the process, his own. What should the public believe? We have three series of growth rates for the economy for the period 2004-05 to 2011-12. First, based on the earlier base year, 2004-05. Second, the series produced by the sub-group of the Statistical Commission in July 2018. And, now the third series produced by the CSO and jointly released by CSO and Niti Aayog.

The second series, which came to light in August, showed that growth during the UPA’s 10 years was better than that during the present government. This raised a political storm with the finance minister criticising the UPA for profligacy to achieve higher growth and leaving a mess for the NDA. The NDA government got a lifeline because the Committee on Real Sector, which released the series, stated that its series ought not to be taken as final. It stated that it had submitted its report to the Statistical Commission which would take a final view of what the revised series ought to be. So, the government legitimately argued that the final series would be released soon. What is now released is that final series.

From the political reaction of the government, it was expected, that the new final series would be different from the series released by the Statistical Commission. The new back series is what the government needed — it shows that growth during its term has been higher than during the UPA regime.

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All estimates of GDP are based on assumptions. Unlike the Census, where enumerators go house to house to count everyone, there is no agency that goes around asking everyone in the country what work they do and how much they earn. Only sample surveys are carried out and that too not of income. Some private agencies carry out income surveys but they are not so reliable. One of the key problems faced by income surveys is that people under-report their incomes to officials. Those with high incomes do not want to report correctly to evade taxes while those with low incomes hope to get some government assistance. So, mostly indirect methods are used to estimate GDP. The economy consists of many sectors, each divided as public and private sector and organised and unorganised sector. Thus, estimation is based on many methods and databases. Each method has its own assumptions for estimating the contribution to GDP. Depending on the method, a particular set of databases are used.

To estimate the contribution of the secondary sector, the Annual Survey of Industry (ASI) and Index of Industrial Production were used prior to 2011-12. These were found to be inadequate. So, from 2011-12 the Ministry of Corporate Affairs data in the MCA21 series was used. The series was first made available in 2007 but its base kept changing every year after that, so it was not comparable and could not be used. When it stabilised in 2011-12, it could be used from that year onward. But a comparable back series prior to 2011-12 could not be generated. The sub-group of the Statistical Commission bridged this gap by using a “production shifting approach”.

The method used in the now official back series should be compatible with the MCA21 series but such data are not available. So what can be done? Revert to the earlier method? But why not the production shifting approach? UN SNA 2008 does not disallow the use of such a method if comparable past data are not available.

The biggest shift in the data is in the tertiary sector. It has been the fastest growing sector of the economy since the 1980s. Its share in the GDP and its growth rate are both reduced in the new back series compared to the earlier series. This pulls down the growth rate of the economy. The big reduction is apparently due to the unorganised sector’s contribution to this sector. How valid is this? For instance, the price index used has been changed and this can make a big difference. Further, for the trade sector, sales tax data instead of Gross Trading Index (GTI) has been used. But the moot point is how much of the unorganised sector was in the sales tax (VAT) net?

Finally, the big holes in data are: One, the unorganised sector which has been declining since 2016 due to the twin impact of demonetisation and GST. If this was to be accounted for, the actual rate of growth of the economy since 2016 would be less than 1 per cent and the whole debate on whether the growth rate was marginally higher during the UPA or NDA regime would become irrelevant. And, second, the impact of the missing black economy, which lowers the rate of growth. The new back series does not address these challenges.

In brief, many new assumptions have been used to create the new back series to show lower growth rates between 2004-05 and 2011-12 while the big problems with the method used remain unresolved.

Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences and author of Indian Economy since Independence: Persisting Colonial Disruption

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