GDP base year row: What's the problem with re-basing India's growth calculations

GDP base year row: What's the problem with re-basing India's growth calculations

The credibility of India's statistical system is at stake because of the commissions and omissions ever since the 2011-12 series was announced in January 2015 and continued through multiple revisions in GDP numbers until now that dent public confidence

When the 2011-12 series was released in January 2015, it marked up the GDP growth to take it higher than China's When the 2011-12 series was released in January 2015, it marked up the GDP growth to take it higher than China's

The November 5 announcement of a revision in the base year for the National Accounts (which provides GDP numbers) from 2011-12 to 2017-18 - which is under active consideration, though not finalised yet -has sparked widespread speculations about the motive and the probable outcome of it.

That is because (a) the economy is on a slowdown for the past five quarters - the GDP growth has fallen from 8.1% in Q4 of FY18 to 5% in Q1 of FY20 - and is expected to fall further and (b) the quality of data has come under greater scrutiny in the past few years with economists and other experts in India and abroad raising serious concerns over political interference and seeking restoration of independence and integrity of the statistical institutions.

Nonetheless, there are sound reasons for a revision in the base year of GDP estimations.

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Revision captures structural changes in economy

A revision in the base year is essential for better policymaking. It is meant to track structural changes in an economy and improve or update macroeconomic indicators that reflect the economic performances of a country. Former CSI TCA Anant had first talked about this in January 2018.

What such a revision entails has been explained by the Ministry of Statistics and Programme Implementation (MoSPI) in a note issued on May 8, 2019.

The note says India graduated to the latest international standards, the 2008 System of National Accounts (2008 SNA) evolved by the UN - which was an update from 1993 SNA - while adopting the 2011-12 series. The 2011-12 series incorporated changes in data sources, expanded coverage and improved procedures in accordance with the new standard but further improvements are needed, especially in plugging holes in the MCA21 database that captures corporate sector output and revision in the index of industrial production (IIP).

The note also says that India now subscribes to the IMF's Special Data Dissemination Standards (SDDS) too, which calls for adopting 'double deflators' in GDP estimations by developing new price indexes.

India currently uses single deflator (price index like CPI, WPI or any other) while countries like the USA, Australia, Canada, France, Germany, Italy, Japan, Mexico and Brazil have switched to double deflators - using separate deflator for output and input.

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Revising base: From 10 to 5 years

There are no set norms for revising the base year. Pranob Sen, the first Chief Statistician of India (CSI) during 2007-10 and also the chairman of the standard-setting National Statistical Commission (NSC) during 2013-16 who was a part of such exercises in the past, says the 2008 SNA recommends developing countries to revise it every five years to capture the structural changes.

"The frequency of revision depends on the rapidity with which structural changes are taking place in an economy. If an economy is stable, there is no need for revision for a longer timeframe. It is a judgement call," he explains.

When India started its National Accounts series in 1948-49, revisions were carried out every decennially (10 years) to coincide with the Population Census primarily because the latter provided the workforce estimates. The practice continued till 1980-81.

Thereafter, since 1993-94, India started using the results of quinquennial (every five years) employment and unemployment surveys (EUS) for the base year revision, reducing the gap in revisions to five years. This practice was broken in 2009-10 because this year was "not considered a 'normal' year as it succeeded the global slowdown of 2008". Hence, the next base year was fixed for 2011-12.

A revision then should have happened from 2016-17. Why this did not happen is not known. Why 2017-18 is being actively considered is because the last round of employment survey (PLFS) and consumer expenditure survey happened for the year 2017-18.

The 2017-18 employment survey (PLFS) is already out - initially junked but released after the 2019 election results were out - showing a 45-year high in the unemployment rate (6.1%). The consumer expenditure survey has not been released yet.

Credibility of statistical data at stake

Apprehensions about the proposed change are mainly because of the doubts about the quality of official data.

The process of estimating the GDP has become quite opaque quite now. So much so that Arvind Subramanian, who was Chief Economic Advisor (CEA) from 2014 to 2018 preparing the Economic Surveys, wrote in July 2019 that, "Since the underlying data are not available publicly, nobody outside the CSO can "estimate GDP".

The National Accounts division is a part of the MoSPI's Central Statistical Organisation (CSO).

This is a new development. PC Mohanan, former chairman of the NSC, says all datasets used for base year revisions prior to 2011-12 were always in the public domain.

That and much more changed in 2015. Here are a few major such turns of events.

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a. Structural change based on highly defective MCA21 dataset

The 2011-12 series used, for the first time, an untested and as-yet-unknown MCA21 database of the Ministry of Corporate Affairs (MCA) that supposedly captures the output of corporate entities in the manufacturing and services sectors.

A significant change in the structural share of manufacturing and services in the GDP that 2011-12 series reflects is largely attributed to it. The impact is shown below using the 2004-05 and 2011-12 series for comparable years.

The share of manufacturing shot up dramatically - from 14.9% to 17.2% of the GDP in FY14 - and that of the services sector fell equally badly - from 67.4% to 59.9% of the GDP in FY14.

The MCA21 is not the public domain even today.

However, when the NSSO published its findings on the MCA21 dataset in its 'Technical Report on Services Sector Enterprises in India' in April 2019, it shocked the economists and others by its revelations.

It said, "about 45% of MCA units were found to be out-of-survey/casualty while the EC/BR frame had about 18% of such cases". This means, (a) about 45% MCA21 units in the services sector (actually disaggregated data adds up to 45.5%) don't exist on ground, don't operate (closed or dysfunctional) or are not engaged in the activities specified against them and (b) such errors in other datasets - Economic Census (EC) and Business Registers (BR) of the states - was much less at a mere 18%.

The MoSPI issued clarifications in response to this finding in May 2019 but that has done little to remove doubts. The MCA21 units in the manufacturing sectors are not yet tested.

b. Doubtful GDP numbers

When the 2011-12 series was released in January 2015, it marked up the GDP growth to take it higher than China's. That sparked the first doubts among economists who talked of a mismatch between the GDP and other indicators.

This was followed by a second round of doubts when the back series data was released nearly four years late in November 2018. There has been much public drama before that with the Niti Aayog rejecting two earlier revisions which showed a higher GDP growth during the UPA years, even though it has no locus standi or expertise in the matter.

When the Niti Aayog finally allowed the back series, the MoSPI document carried the following graph to show how it had marked down the GDP numbers for the UPA years.

c. Counter-intuitive high growth post-demonetisation and GST

That was followed by a further revision in the GDP numbers a day ahead of the February 1, 2019 budget. The GDP growth for FY17 - the year of demonetisation - was raised from 7.1% to 8.2%, the highest in the decade, and for FY18 - the year of GST introduction - from 6.7% to 7.2%.

Subramanian, in his 2018 book, mentioned the twin shocks of demonetisation and GST and how they damaged the economy. About the former, he wrote, "demonetisation was a massive, draconian, monetary shock" that led to a fall in the GDP for the next 7-8 quarters.

In June 2019, Subramanian wrote a paper for Harvard University saying that India's growth estimate had been exaggerated by around 2.5 percentage points between 2011-12 and 2016-17. When this was rebutted, Subramanian stuck to his guns, wrote another paper pointing out that not only had he said as much in his Economic Surveys, he also made the comment quoted earlier, "Since the underlying data are not available publicly, nobody outside the CSO can "estimate GDP".

What do experts think of base year revision

Sen says the choice of 2017-18 as the new base year is bad because it was "not a normal year" and that 2018-19 could be a better choice. That is because he says, the year 2017-18 saw the impact of the two major economic disruptions - demonetisation announced in November 2016 and the GST in July 2017.

As for the tentativeness in the MoSPI's voice to fix the new base year - while it said on May 8, 2019, that it was working on the 2017-18 base, Pravin Srivastava, MoSPI secretary who also doubles up as the CSI, indicates that this would be fixed in the next few months - Sen says the crucial considerations in the revision are the availability of employment and consumer expenditure surveys. While the first showed 2017-18 to be a bad year for employment (6.1% unemployment rate), the second (not yet made public) might not have been good either.

Mohanan and C Rangarajan, former RBI governor, also think 2017-18 is not a normal year because of the impact of demonetisation and GST. Rangarajan says the government would run into a problem if does chooses a low-income year of 2017-18 and "need to start explaining higher growths in the previous years" that it would lead to.

Mohanan says his main concern is about the MCA21 which substantially raised the share of manufacturing GDP and reduced that of the services GDP. This dataset is not in the public domain yet and the questions that the NSSO's April 2019 report raised about its quality has to be sorted out and settled to the satisfaction of experts before being used again.

MoSPI officials keep mum

Repeated attempts to contact the MoSPI officials and seek their responses (through a personal meeting, phone or mail) to some of the questions and apprehensions that arise out of the proposed revision went unanswered. Srivastava redirected the questions to his two deputies - TK Sanyal (GD) and NK Sharma (ADG) in the Central Statistical Organisation (CSO) - who refused to respond. Anant, who is

now a UPSC member, excused himself citing the UPSC's "tradition" of not making media or public comments.

Further clarity, it seems, would come when the new series is announced by the MoSPI.