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Mainstream, VOL LVII No 28 New Delhi June 29, 2019

The GDP Growth Debate going Out of Hand

Sunday 30 June 2019, by Arun Kumar

The former Chief Economic Advisor, Dr Arvind Subramanian, has set the cat among the pigeons by coming out with a paper (referred to as AS below) showing that the Indian GDP growth has been over-estimated in the period 2011-12 to 2016-17 by 2.5 per cent. So, the average growth rate during this period, instead of being seven per cent, would be 4.5 per cent. More accurately between 3.5 per cent and 5.5 per cent.

Some have confused this with the latest GDP growth data showing the Indian economy slowing down to 5.8 per cent. AS is not talking of this slowing down of the economy but of mis-estimation during the earlier years up to 2016-17. If the AS analysis can be extended, the current rate of growth may turn to be close to 3.3 per cent. AS should also not be confused with the controversy regarding the incorrectly specified unorganised sector data used in calculating the current GDP.

So, what is AS about? It uses a methodology different from the usual one used to estimate the GDP and its growth rate. Why was this required? The usual way divides the economy into sectors and adds up the contribution of each of them to get the total size of the economy. There are nine major sectors in the economy with each divided into public and private sectors and organised and unorganised sectors. So, one is talking of 27 sectors because the public sector is an entirely organised sector. There is need for data for each of these sectors and also a method for estimating their contribution to the GDP. Why go for a different method when such an elaborate method is used by the statistical department of the government?

Ever since January 2015, controversy has dogged the GDP and its growth. The base year for calculating the GDP is changed periodically and this was changed to 2011-12 (from the earlier 2004-05). The results for the new series were declared in January 2015 when the NDA Government was in power. This new series showed a sharp jump in the growth rate of the economy. Even the dismal performance during the UPA-II years looked better. The NDA performance distinctly looked better than what people remembered as the UPA performance. They did not look at the improved figures of the UPA years, so the NDA took credit for the economic recovery.

But there was no back series before 2011-12, so one could not tell if the earlier performance was also better. Many experts also questioned the new data because the economy did not seem to be doing so well; at seven to eight per cent rate of growth there should have been feel good all around but that was missing. Within the committee which had recommended the use of the new data base for the private firms (called MCA21) there were disagreements. There were companies that were not filing returns, benami companies, etc. So, the data needed closer scrutiny. How were the companies which were not filing returns to be counted and what would be the implication of existence of a large number of fictitious companies called ‘shell companies’? A blowing-up factor was applied to account for these companies but critics felt that this could give an upward bias to the GDP calculations.

A committee of the National Statistical Commission came up with a back series in 2018. But the government did not like it since it showed better performance under UPA-I and II than under NDA-II. To construct this back series a new methodology was adopted since the data was not available for the earlier period. The government rejected it.

The government later in 2018 came out with another series which showed that the perfor-mance under NDA-II was better than under UPA-I and II. Such a switch in results is always possible since the GDP is an estimate based on many assumptions. One can choose different assumptions to come up with different results. Be that as it may, this was seen as a politically motivated GDP series. What strained credulity was that the GDP growth was shown to be the highest during the year of demonetisation—8.2 per cent in 2016-17. By all accounts the economy had tanked that year with decline in employ-ment, investment, credit off-take and rise in work demanded under MGNREGS by workers losing work in urban areas and returning to rural areas. The government withheld employ-ment data till after the elections since it showed unemployment reaching a 45-year high of 6.1 per cent. Data on employment generated by MUDRA loans and farmers’ suicide data since 2016 have not yet been released.

Now in 2019, it has been revealed that the MCA data has 38.6 per cent ‘out of survey’ companies. The initial fear of the experts that the use of MCA data base may lead to over- estimation was being validated. So, the new GDP series has faced five controversies. These are difficult to resolve since one cannot go back and collect data of the past again.

Consequently, to settle the doubts a new method has to be found to estimate the GDP. One can look for variables which can predict the GDP well. Also, one can look for the inter-national experience in the matter, as AS has done.

The government has come out with guns blazing trying to discredit AS’s method and the results. Certainly the method can be criticised because of several infirmities pointed out by this author in the last three years. Like, the missing unorganised sector data, especially after the three shocks administered to the economy since 2016 November—demonetisation, GST and the NBFC crisis—and the missing black economy data. Further, the Indian economy is unlike any other economy since it has a huge unorganised sector, so comparisons with other economies can be erroneous. But these issues can wait till AS is analysed in detail.

As the government was embarrassed so its spokespersons started attacking AS. First, they say that the change in base year to 2011-12 was based on expert advice. Of course, but there was unsettled controversy among experts which is now proving to be damaging to the official series. Second, it is said that the new series follows the UN mandated methodology (of 2008). But that methodology does not justify the use of an erroneous data base or tweaking the services sector in such a way as to show higher growth in some periods and lower growth in other periods. Third, in support of the official data it is argued that experts from the IMF and World Bank have accepted the new series. But they are not data gathering agencies and have to accept the data given to them by the government. This is not independent corroboration of data. Fourth, it is said that base change is a normal process of GDP estimation. But AS is not objecting to base change. The issue is what data base should be used to estimate the GDP. Certainly not one which has large errors in it.

Fifth, it is argued that a larger data base is being used. But, no one is saying that a better data base should not be used. What is being said is that the newer data base is erroneous, hence not necessarily better. It should be used after the errors are fixed. Sixth, official estimate is said to be based on accepted methodologies. But, the criticism is of the assumptions being suitably chosen so that the method does not remain objective as officially claimed. Seventh, the official position is that AS is attempting to sensationalise the matter. So, if one finds errors should one keep quiet? More importantly, can one make policies with incorrect data and should not one apply correctives as soon as possible? Finally, it is asked, why did Dr Subramanian not object to the GDP data while he was in office as the CEA? But, he did express doubt in the 2015 Economic Survey. As a responsible government officer could he have done more? If he had resigned would that not have created a much bigger stink?

In brief, this is not the time to raise false issues around a new way of estimating the GDP, even if it is itself erroneous. The need is to grapple with the more serious issue of what is Indian economy’s more correct growth rate.

After all, polices depend on the correct figures.

The author, an eminent economist, is the Malcolm Adiseshiah Chair Professor, Institute of Social Sciences, New Delhi. He is the author of Indian Economy Since Independence: Persisting Colonial Disruption, published by Vision Books. He can be contacted at e-mail: nuramarku[at]gmail.com and arunkumar1000[at]hotmail.com

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