Though not calculating the years that followed, he writes in a new paper, “there were also substantial upward revisions to estimates” later despite the adverse impact of two major policy actions of the Modi government – demonetization and GST – Subramanian, former chief economic adviser (CEA), Modi government, says.
Thus, in 2017 and 2018, Index of Industrial Production (IIP) manufacturing growth registered positive growth of 3.3 percent and 5.3 percent, respectively, and this became part of the GDP calculation, what is not taken into account was the fact that the “informal sector registered negative growth in these years because of demonetization and GST.”
Worse, he underlines in his 34-page paper, “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications”, published by the Centre for International Development at Harvard University, US, that the Government of India estimates of real Gross Value Added (GVA) growth for the informal sector during this period was “based on and proxied by IIP, which is mostly composed of formal sector firms.”
The top economist, who is currently associated with the Peterson Institute for International Economics and the Harvard University's Kennedy School of Government, says, this happened despite the fact that “the informal sector accounts for 30 percent of manufacturing GVA and hence about 5 percent of overall GVA.”
Claiming that “this proxy might be reasonable in normal times”, Subramanian says, during a period when major policy actions — demonetization and GST — are taken, this would have “disproportionately” impacted the informal sector.
Author of the Government of India’s annual Economic Surveys, released ahead of the Central Budget during his stint as CEA between 2014 and 2018, he believes, such “growth over-estimates matter not just for reputational reasons but critically for internal policy-making.”
Noting that changes in estimating GDP began under UPA-2 and “were completed by the statisticians and technocrats in late 2014, a few months after the NDA-2 government came into power”, Subramanian says, it is India’s interest to “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.”
Subramanian wants the Government of India must revisit the “entire methodology and implementation for GDP estimation” by appointing “an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature” by including in it “not just statisticians but also macro-economists and policy practitioners.”
He underlines, “If statistics are sacred enough to require insulation from political pressures, they are perhaps also too important to be left to the statisticians alone. Nothing less than the future of the Indian economy and the lives of 1.4 billion citizens rides on getting numbers and measurement right.”
“If statistics are potentially misleading about the overall health of the economy, they influence the impetus for reform in serious and perverse ways. For example, if India’s GDP growth had been appropriately measured, the urgency to act on the banking system challenges or agriculture or unemployment could have been very different”, the economist adds.
Pointing out that “for every economy, accurate measurement of key indicators, especially GDP growth and its constituents, is critical for credibility and investor and consumer confidence, for sound policy navigation, and for the impetus and incentives it creates for the urgency and nature of reform”, he states, his estimation suggests, “instead of the reported average growth of 6.9 percent between 2011 and 2016, actual growth was more likely to have been between 3 ½ and 5 ½ percent.”
Methodological changes
Subramanian, who mysteriously resigned from as CEA of the Narendra Modi government in 2018, says that the over-estimation is the result of “methodological changes” initiated under the UPA-2 “as part of the periodic base revisions to estimating the National Income Accounts (NIA) by using the Ministry of Corporate Affairs’ (MCA) financial accounts for hundreds of thousands of companies.”
Noting that “cumulatively, over five years, the level of GDP might have been overstated by about 9-21 percent”, he says, his estimation is based on an analysis of the data in the period 1991-2015, by posing the question: “How many emerging market countries had attained 7.5 percent growth with India’s combination of investment, export and credit growth?”
Insisting that the answer to this question is a big zero, Subramanian says, “Indeed, countries with performance on those indicators similar to India’s had not even managed average real GDP growth of 5 percent.” He reaches this conclusion on the basis of 17 standard “real” indicators “strongly correlated with GDP growth for the period 2001-2017”.
Noting that “cumulatively, over five years, the level of GDP might have been overstated by about 9-21 percent”, he says, his estimation is based on an analysis of the data in the period 1991-2015, by posing the question: “How many emerging market countries had attained 7.5 percent growth with India’s combination of investment, export and credit growth?”
Insisting that the answer to this question is a big zero, Subramanian says, “Indeed, countries with performance on those indicators similar to India’s had not even managed average real GDP growth of 5 percent.” He reaches this conclusion on the basis of 17 standard “real” indicators “strongly correlated with GDP growth for the period 2001-2017”.
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| Annual average growth, selected indicators and GDP, 2001-11 & 2012-18 (%) |
The 17 indicators Subramanian identifies are: Electricity consumption, two-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, index of industrial production (manufacturing), index of industrial production (consumer goods), petroleum consumption, cement, steel, overall real credit, real credit to industry, exports of goods and services, and imports of goods and services.
India’s “16 out of 17 indicators are positively correlated with GDP growth before 2011”, says Subramanian, adding, however, “post-2011, 11 out of 17 indicators are negatively correlated with GDP.” Emphasising that the contrast between the two periods is striking, he gives four major examples to prove his point:
India’s “16 out of 17 indicators are positively correlated with GDP growth before 2011”, says Subramanian, adding, however, “post-2011, 11 out of 17 indicators are negatively correlated with GDP.” Emphasising that the contrast between the two periods is striking, he gives four major examples to prove his point:
- export (goods and services) growth is 14.5 percent before 2011 and 3.4 percent thereafter;
- for imports (goods and services), the corresponding numbers are 15.6 percent and 2.5 percent, respectively; the behavior of imports in itself provides compelling evidence of mis- measurement because such staggering declines are simply incompatible with stable underlying GDP growth;
- production of commercial vehicles grew at 19.1 percent before 2011 and minus 0.1 percent after 2011; and
- only petroleum consumption and electricity grew marginally faster post-2011 than pre-2011.
Comments Subramanian, “What do all these results mean for the magnitudes of over-estimation of GDP growth? All the results robustly and consistently point to over-estimation of GDP growth.”
Thus, “Annual average growth of imports of goods and services was 15.7 percent between 2001 and 2011. Between 2011 and 2018, this declined dramatically to 2.5 percent despite the real effective exchange rate having appreciated mildly over this period which should have increased import growth. Such sharp declines in import growth are probably only consistent with large declines of annual real GDP growth.”
Also blaming a key methodological change, the move from establishment-based data from the Annual Survey of Industries (ASI) and Index of Industrial Production (IIP) to financial accounts-based data compiled by the Ministry of Corporate Affairs (MCA) for the over-estimation, Subramanian says, “It apparently enlarged the scope of economic activity that was covered: More than 600,000 companies file MCA data.”
However, states the economist, “There were always doubts about the quality of some of the MCA data relating to shell companies especially in the services sector.” Worse, “The quarterly growth estimates and their first (two) revisions are based on a much smaller set (roughly in the range of 3000-5000) of relatively large companies.”
Thus, “Annual average growth of imports of goods and services was 15.7 percent between 2001 and 2011. Between 2011 and 2018, this declined dramatically to 2.5 percent despite the real effective exchange rate having appreciated mildly over this period which should have increased import growth. Such sharp declines in import growth are probably only consistent with large declines of annual real GDP growth.”
Also blaming a key methodological change, the move from establishment-based data from the Annual Survey of Industries (ASI) and Index of Industrial Production (IIP) to financial accounts-based data compiled by the Ministry of Corporate Affairs (MCA) for the over-estimation, Subramanian says, “It apparently enlarged the scope of economic activity that was covered: More than 600,000 companies file MCA data.”
However, states the economist, “There were always doubts about the quality of some of the MCA data relating to shell companies especially in the services sector.” Worse, “The quarterly growth estimates and their first (two) revisions are based on a much smaller set (roughly in the range of 3000-5000) of relatively large companies.”
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