Exploding the myth of India being among the ‘fastest growing economies’ in the world, former Chief Economic Adviser Arvind Subramanian says real Gross Domestic Product (GDP) growth of the country may have been overestimated between 2011 and 2017, faulting the Manmohan Singh and Narendra Modi regimes. However, he provides relief to those behind it saying it was 'not political'.
The growth was actually just 4.5 per cent and noy, 7 per cent as projected, he says in his research paper published by the Center for International Development at Harvard University,
It was all because of a change in methodology and data sourcing from 2011-12, resulting in inflated estimates, his paper says.
Earlier, data was sourced from the factory level, which was changed to 5 lakh companies registered with Ministry of Corporate Affairs. GDP calculation was shifted from factory costs to market ones. This meant cost of production gave way to that of the market, excluding subsidies and was based on the actual expenditure incurred by consumers.
It was argued that this was following global practices though Arvind says it led to significant growth overestimation.
“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,” his paper says. The new methodology made the GDP estimates "more sensitive to price changes" at a time when oil prices were falling, deflating "input values by output prices", which overstated manufacturing growth. Drawing a parallel, he says,
“The Indian policy automobile has been navigated with a faulty or even broken speedometer."Employment and agriculture and corporate financial stress coupled with low capacity utilisation were considered anomalies despite ‘good growth’ resulting in 'weaker-than-believed growth'.
This misleading idea about the health of the economy has impacts on the impetus for reform and the action to be taken would have been different if the real situation was understood.
Aravind feels interest rate too was high by 150 basis points. “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. It is understandable when policy makers favour status quo if that status quo is apparently delivering the fastest growth rate of any major economy in the world. But if growth is actually 4.5 per cent instead of 7 per cent, attitudes to policy action should and would be very different,” his paper says.
He suggests solutions too; “Going forward, there must be both the urgency from the new knowledge that growth is weaker-than-believed and the re-embrace of growth as necessary to accomplish other objectives.” There is the urgent need to restore the reputational damage suffered to data generation people with "stellar technical and personal reputations" must be posted. An independent taskforce should revisit "the entire methodology and implementation for GDP estimation".
On his premise that there was nothing political in this, he said the change in estimation methodology was initiated by the UPA-2 regime, "as part of the changes that routinely occur with base revisions to GDP estimates" and was completed only in late 2014, which was after the Modi Government came to power.