About two years after the then chief economic adviser Arvind Subramanian expressed doubts over India's gross domestic product (GDP) growth story, he seems to have found an answer to the puzzle. The change in data sources and methodology for GDP calculation since 2011-12 did the trick, he says, adding that the changes might have led to significant overestimation of the official GDP estimates. In place of the average GDP growth of about 7 per cent between 2011-12 and 2016-17, India must have only grown at about 4.5 per cent, he argues.
The conclusions made by Subramanian, currently a visiting professor at Harvard University's Kennedy School of Government, USA, forms part of a just released faculty working paper titled 'India's GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications' of the university.
So, when did Subramanian first raise the red flag? In the Economic Survey of 2016-17, he says. And he is right.
The much-awaited survey did an analysis of the demonetisation that happened in November 2016. It was the Volume II of the Survey, which was brought out in August 2017, six months after the first part got released at the time of the presentation of Union Budget 2017-18. The Survey said that the GDP estimates that year indicated a demonetisation puzzle. "While real growth decelerated, the slowdown was much smaller than expected: growth for the year as a whole was much higher than the range of 6.5-6.75 per cent estimated in the Economic Survey 2016-17 Volume I. Even more striking, nominal GDP growth actually accelerated after demonetisation," Subramanian had observed in the Survey.
Explaining further, the Survey pointed out that in the last two years (2015-17), real GDP growth had averaged around 7.5 per cent against the context of weak investment, export volume and credit growth. "This wedge between steady growth and its underlying (relatively weak) drivers raises a question and also poses a puzzle". The Survey did attempt to explain this "puzzle" through a cross-country comparison to investigate whether in the last 25 years there have been similar experiences in other emerging market countries (that is, of successive two-year periods where Indian levels of growth were achieved with such a combination of factors, i.e. Indian levels of real investment, export volume, and credit growth witnessed in 2015-16 and 2016-17). The quest may not have given conclusive answers at that time, but the current study has, says Subramanian.
"The evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust. Lending further credence to the evidence, part of the overestimation can be related to a key methodological change, which affected the measurement of the formal manufacturing sector," he notes in his Harvard report. According to Subramanian, the findings alter our understanding of India's growth performance after the Global Financial Crisis, from spectacular to solid. "Two important policy implications follow: the entire national income accounts estimation should be revisited, harnessing new opportunities created by the Goods and Services Tax to significantly improve it; and restoring growth should be the urgent priority for the new government," he says.
Timely message, as the government gives finishing touches to its full Budget (2019-20) to be presented on July 5.
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