The Indian economy may have grown at an annual rate of just around 4.5 per cent during 2011-12 to 2016-17, according to an article written in this newspaper by Arvind Subramanian. This figure is much lower than the official estimate of 7 per cent for the same period.
The growth overestimation of 2.5 percentage points is significant not only for its coming from the former chief economic adviser, but also for the fresh questions it raises over the new methodology followed in computation of GDP.
Subramanian has consciously sought to steer away from any political controversy by pointing out the fact that the period for this analysis covers both the UPA-2 and the NDA-2 government. Moreover, the shift in methodology — from a predominantly volume-based to a value-based measurement of GDP to better capture qualitative changes in a modern, dynamic economy — were initiated under the UPA regime, resulting in a bump-up of growth in its last year (2013-14). In other words, nothing “political” should be read into Subramanian’s piece, which provides a strong case for a relook of the new GDP estimation process as well as the high-growth assumptions guiding policymaking in the last few years.
What Subramanian has done is to track the performance of 17 indicators — electricity, steel, cement and petro-products consumption; two-wheeler and commercial vehicles sales; exports and imports of goods and services; and bank credit growth, among others — that are considered reliable proxies for economic activity. The interesting finding is that while in the period before 2011-12, these indicators strongly correlated with GDP growth, the one-to-one relationship broke down subsequently.
That this negative correlation is coterminous with the introduction of the new GDP series from 2011-12 cannot be baulked at. Subramanian traces the overestimation of GDP primarily to the manufacturing sector. In pre 2011-12, value added in manufacturing tended to move in line with the index of industrial production and exports for this segment. But there is very little connection between these post 2011-12. The Central Statistics Office’s use of the Ministry of Corporate Affairs’ (MCA) financial data for companies, as opposed to establishment-based production data, has been questioned by many researchers for a lack of transparency and consistency.
Subramanian’s analysis should help generate useful debate over the current methodology for computation of GDP. The CSO should, as a first step, invite independent economists and statisticians to deliberate on it. The MCA, too, should provide access to its companies’ database to researchers for independent validation. Equally important, if the economy has indeed been growing at well below what the official GDP data shows, it raises concern over what seems to have been an overly tight monetary policy since the time of Raghuram Rajan as Reserve Bank of India governor. That the RBI has in the past few months displayed more flexibility is probably an encouraging sign.