Former CEA Arvind Subramanian Mulls Over the Consequences of India’s GDP Growth

Former Chief Economic Adviser to the Government of India Arvind Subramanian postulates India’s average annual growth between 2011-12 and 2016-17 has been overestimated by 2.5% points.

Subramanian, who served his position during the period of 2014-18, has pointed out in a research paper that 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%.” He notes, “A variety of evidence—within India and across countries—suggests that India’s GDP [gross domestic product] growth has been over-stated by about 2 ½ percentage points per year in the post-2011 period, with a 95 percent confidence band of 1 percentage point.”

The paper, made public on Tuesday morning, traces “part of the overestimation” to a key methodological change in the way India calculated GDP – the measurement of the formal manufacturing sector. Especially, the paper calls attention with highlighting that while formal manufacturing growth moved plausibly with other indicators of manufacturing such as the Index of Industrial Production numbers in the pre-2011 period, they diverged “starkly” thereafter.

It further noted that “Similarly, formal manufacturing growth is positively correlated with manufacturing exports in the pre-2011 period but puzzlingly becomes negatively correlated thereafter. The results in the paper suggest that the heady narrative of a guns-blazing India must cede to a more realistic one of an economy growing solidly but not spectacularly.”


17 Key Indicators en route to India’s GDP Growth

Ahead of his postulation, Subramanian also plots 17 key indicators that are typically associated with GDP growth for the period 2001-02 to 2017-2018. Before 2011, 16 of those indicators positively correlated with India’s GDP growth, which changes after that year. But, post-2011, 11 out of 17 indicators are negatively correlated with GDP.


India’s Central Statistics Office (CSO)

4-year back in 2015, India’s CSO replaced the country’s GDP series with the base year 2004-05 with a new series, which used 2011-12 as a baseline.

The Central Statistics Office is a governmental agency in India, works under the Ministry of Statistics and Programme Implementation and accountable for the coordination of statistical activities in India, and evolving and maintaining statistical standards.

At that time, the CSO pointed out that the new series followed the guidelines of the United Nations’ System of National Accounts (UNSNA) 2008, replacing the earlier template of UNSNA 1994. This included a number of fresh changes, such as using the corporate affairs ministry’s MCA-21 database to estimate the contribution of the private sector to domestic output, which has in recent times been questioned.

Subramanian’s research paper further notes, “Cumulatively, over five years, the level of GDP might have been overstated by about 9-21 percent. This finding relates to averages over the 2011-2016 period, which encompasses both the UPA-2 and NDA-2 governments. They do not speak to how this average over-estimation may have varied over time within the post-2011 period. At this stage, the data are not adequate to answer such granular questions.”

He says that the one sector where “mis-measurement seems particularly severe” was manufacturing. Before 2011, the manufacturing value added in national accounts were tightly correlated with the manufacturing component of the Index of Industrial Production and manufacturing exports. But afterward, the correlations turn strongly and bizarrely negative.

In an article with The Indian Express, Subramanian ponders the consequences of reduced growth during this period. He writes, “Most important, restoring growth must be the key policy objective…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.”

The former economic adviser also called for an independent task force, which encompasses both national and international experts, statisticians, macro-economists and policy users, to revisit the GDP estimation. Indeed, this revisiting may throw up exciting, new opportunities, such as using the large amounts of transactions-level GST data that is now being generated, to estimate — for the first time in India — expenditure-based estimates of GDP, he noted.

Subramanian also said he and his team grappled with conflicting economic data and some level of criticism will naturally center around his role on the issues while he was the chief economic adviser. He noted on this issue that “We raised these doubts frequently within government, and publicly articulated these in a measured manner in government documents, especially the Economic Survey of July 2017.”