Arvind Subramanian: India’s GDP growth overestimated by 2.5% between 2011-2017

Rather than growing at about 7% a year in that period, growth was about 4.5%, according to the research paper, published by the Center for International Development at Harvard University

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New Delhi: Former Chief Economic Adviser Arvind Subramanian has said that India’s economic growth rate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17 due to a change in methodology for calculating gross domestic product (GDP).

The nation has held the crown of the world’s fastest-growing major economy until recently, but a new study by former Chief Economic Adviser Arvind Subramanian says the expansion was overestimated between 2011 and 2017. Rather than growing at about 7% a year in that period, growth was about 4.5%, according to the research paper, published by the Center for International Development at Harvard University.

“India changed its data sources and methodology for estimating real GDP for the period since 2011-12. This paper shows that this change has led to a significant overestimation of growth,” he said in the paper.

The paper comes amidst controversy over the country’s economic growth under the new GDP series. The revision in the methodology happened during the first term of the Modi government.

“Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7%. We estimate that actual growth may have been about 4.5% with a 95% confidence interval of 3.5-5.5 %,” he said.

Manufacturing is one such sector where the calculations have been largely mis-measured, wrote Subramanian, who quit as the chief economic adviser in August last year before his extended tenure was to end in May 2019.

He said the evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust.

According to Subramanian, 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.”

Change in GDP calculation methodology

The Modi government had in January 2015 updated base year for GDP calculation to 2011-12, replacing the old series base year of 2004-05. Using this, in August last year the growth numbers were recalibrated by the Sudipto Mundle Committee set up by the National Statistical Commission.

In the period before 2011, manufacturing value added in the national accounts used to be closely correlated with the manufacturing component of the Index of Industrial Production (IIP) and manufacturing exports. However, according to Subramanian, this link has broken down.

He said his analysis was based upon 17 key economic indicators for the period 2001-02 to 2017-18 with a higher interdependence with the GDP growth.

“The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer,” he says in the paper.

One of the key adjustments was a shift to financial accounts-based data compiled by the Ministry of Corporate Affairs, from volume-based data previously. This made GDP estimates more sensitive to price changes, in a period of lower oil prices, according to the research paper. Rather than deflate input values by input prices, the new methodology deflated these values by output prices, which could have overstated manufacturing growth.

The latest study throws more doubt over India’s economic statistics. A growing number of critics have questioned India’s high growth estimates under Prime Minister Narendra Modi’s government.

Last month, official data showed that economic growth slowed down to a five-year low of 5.8 per cent in January-March, pushing India behind China, due to a poor showing by agriculture and manufacturing sectors.