The growth numbers have come back to haunt the government with former Chief Economic Advisor (CEA) Arvind Subramanian also questioning the change in GDP calculation methods and numbers effected last year.
In his recent research paper published by Harvard University, the former CEA has said there is a possibility of substantial overestimation in the growth figures while stating that the actual GDP growth between 2011-12 and 2016-17 was around 4.5 per cent as against 7 per cent.
“A variety of evidence suggests that the methodology changes introduced for the post-2011 GDP estimates led to an over-estimation of GDP growth”, he said.
Subramanian has suggested that India’s gross domestic product (GDP) growth estimate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17, a period that covers the years during both the UPA and the NDA governments.
The adotion of a new GDP series to measure the country’s economic growth, months after the government itself slashed previous UPA-era GDP growth rate for 2010-11 from the earlier estimated 10.3 per cent to 8.5 per cent, has fuelled controversy.
Subramanian said: “This paper shows that India changed its data sources and methodology for estimating real gross domestic product (GDP) for the period since 2011-12. 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 per cent. We estimate that actual growth may have been about 4.5 per cent with a 95 per cent confidence interval of 3.5 – 5.5 per cent,” the research paper added.
The ex-CEA says there was “Proxying Informal by Formal Activity”.
The informal sector accounts for 30 per cent of manufacturing gross value added (GVA – excludes taxes) and hence about 5 per cent of overall GVA. According to the paper, this proxy might be reasonable in normal times. But it likely overestimated growth during a period when major policy actions – “demonetization and GST” – disproportionately impacted the informal sector.
Two important policy implications follow, says the ex-CEA, adding that the entire national income accounts estimation should be revisited, harnessing new opportunities created by the Goods and Services Tax (GST) to significantly improve it, while restoring growth should be the urgent priority for the new government.
“India must restore the reputational damage suffered to data generation in India across the board — from GDP to employment to government accounts — not just by conferring statutory independence on the National Statistical Commission, but also appointing people with stellar technical and personal reputations,” the paper said.
“At the same time, the entire methodology and implementation for GDP estimation must be revisited by an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature. And it must include not just statisticians but also macro-economists and policy practitioners.”
Asserting that the overestimation is not political in nature, Subramanian, who was the CEA between 2014 and 2018, said this must be distinguished from recent controversies over a back-casting exercise and “puzzling upward revisions” for recent years.