GDP growth overestimated during 2011-12 and 2016-17: Arvind Subramanian

Arvind Subramanian has just stirred the proverbial hornet's nest. In his latest research paper, the former chief economic advisor said India’s GDP growth between 2011-12 and 2016-17 was probably bumped up by about 2.5 per cent.

Instead of the reported growth of 6.9% between 2011 and 2016, actual growth was more likely to have been between 3.5% and 5.5%, says Subramanian.

"A variety of evidence—within India and across countries—suggests that India’s GDP growth has been over-stated by about 2.5 percentage points per year in the post-2011 period, with a 95 per cent confidence band of 1 percentage point,” said the research paper.

"The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer,” he writes.

CSO data showed that economic growth slowed to a five-year low of 5.8 percent in the fourth quarter of 2018-19, pushing India behind China, due to poor showing by agriculture and manufacturing sectors.

In the paper published at Harvard University, Subramanian has noted that the one sector where mis-measurement is particularly high was manufacturing.

Pre-2011, manufacturing value added in national accounts tended to be tightly correlated with the manufacturing component of the index of industrial production and manufacturing exports. But, thereafter, a key methodological change affected the measurement of the formal manufacturing sector, notes the former CEA.

The former CEA asserts that the overestimation is not political. "My research suggests that post-global financial crisis, the heady narrative of a guns-blazing India - that statisticians led us to believe - may have to cede to a more realistic one of an economy growing solidly but not spectacularly," he wrote in an Indian Express column.

He clarifies that the changes must be separated from recent controversies over a back-casting exercise and "puzzling upward revisions" for recent years.

"The work was done by technocrats, and largely under the UPA-2 government," he says. The effort was desirable, both to expand the data for GDP estimation and to move to a methodology more suited for a technologically advancing, dynamic economy, according to him.

Subramanian says "inaccurate statistics" have dampened the impetus for reform, had the actual growth numbers been known, the urgency to act on the banking system or on agricultural challenges would have been greater.

He has also suggested that GDP estimation be revisited by an independent task force which would comprise of national and international experts, statisticians, macro-economists and policy users.

According to him, the popular narrative has been one of "jobless growth", hinting at a disconnect between fundamental dynamism and key outcomes. "In reality, weak job growth and acute financial sector stress may have simply stemmed from modest GDP growth. Going forward, there must be reform urgency stemming from the new knowledge that growth has been tepid, not torrid; And from recognising that growth of 4.5 per cent will make the government's laudable inclusion agenda difficult to sustain fiscally."

The abstract of the research paper reads:
India changed its data sources and methodology for estimating real gross domestic product (GDP) for the period since 2011-12. This paper shows that this change has led to a significant overestimation of growth. Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7 percent. We estimate that actual growth may have been about 4½ percent with a 95 percent confidence interval of 3 ½ -5 ½ percent. The evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust. Lending further credence to the evidence, part of the overestimation can be related to a key methodological change, which affected the measurement of the formal manufacturing sector. These findings alter our understanding of India’s growth performance after the Global Financial Crisis, from spectacular to solid. Two important policy implications follow: the entire national income accounts estimation should be revisited, harnessing new opportunities created by the Goods and Services Tax to significantly improve it; and restoring growth should be the urgent priority for the new government.