Conundrum of India’s Growth Story

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The tag of the fastest growing large economy in the world is one which India celebrated with great pride.  As per the recent Organisation for Economic Co-operation and Development (OECD) report, India will not only continue to hold the tag of the fastest growing economy in the world, but will also widen its lead over China. As per the report, the Indian economy is expected to grow by 7.2 percent in FY19 and 7.5 percent in FY20.

However, India’s Gross Domestic Product (GDP) growth story is under scrutiny with the former Chief Economic Advisor, Dr. Arvind Subramanian, raising doubts in the GDP growth rate of India. In his paper published for Harvard University, he states that the GDP growth rate of India has been overestimated between 2011 and 2016. The paper states that the revision of data sources and methodology for the estimation of real GDP in 2011-12 has led to the overestimation of GDP growth rate. Though the official estimates of GDP growth between 2011-12 and 2016-17 stands at 7 percent, the GDP growth rate estimated by Dr Subramanian stands at 4.5 percent.

Where the issue lies?

In the paper, the relationship of 17 indicators[1] to the GDP growth is compared for two time periods i.e. 2001-11 and 2011-16. The annual growth rate of the 17 indicators is plotted against the GDP growth for the two time periods. Since, the GDP growth rate in both the time periods were more or less similar, i.e. 7.5 % and 6.9 %, much change in the annual growth rate of the indicators was not expected for the two time periods. However, the results were found to be different.

For instance, exports of goods and services registered a growth rate of 14.5 percent before 2011 and 3.4 percent post 2011. Similarly, imports registered a growth rate of 15.6 percent and 2.5 percent respectively during the two time periods. The production of commercial vehicles grew at 19.1 percent in pre-2011 period while it registered a negative growth rate of 0.1 percent in post-2011. It was found that only petroleum consumption and electricity grew at a marginally faster rate in the post-2011 period.

Dr. Subramanian argues that with lower average values for nearly all the indicators and the negative correlation it has with the GDP growth in post-2011, it is not possible for the country to achieve 7 plus growth rates. It paves the way to conclude that the GDP growth rate of the country could have been overestimated in the post-2011 period.

The paper also highlights the issue raised in the Economic Survey (2017) where India posted a growth rate of 7.5 percent in 2015-17, even when the real investment and export volume registered a growth of 4.5 and 2 percent respectively. During the same period, the credit-GDP ratio had fallen by 2 percentage points. None of the emerging economies in the world were able to attain a 7.5 percent growth rate with such a combination of export growth, real investment growth and credit-GDP ratio. The countries with performance of indicators in the similar level to that of India has not even managed to attain a growth rate of 5 percent. In such a scenario, he suggests that there could be a measurement problem in the GDP calculation. In order to measure the magnitude of the over-estimation of the GDP data, he developed a model by including four indicators viz. credit, exports, imports and electricity consumption. Using the model he estimated that in post-2011, the GDP growth rate has been over estimated by 2.5 percent.

Need for credible data

There could be agreements and disagreements on the findings of the paper, and the methodology used by Dr. Subramanian in the estimation of GDP. However, the credibility and authenticity of data is an issue that has been debated for a very long time in the country. Barring the political angle, both the GDP data and job data of the country has received flaks from different quarters. For instance, concerns on the GDP data were also raised by other leading economists like the former RBI governor, Raghuram Rajan, and IMF Chief Economist Gita Gopinath.

In such a scenario, there is a need for a complete overhaul in the country’s statistical system. Credibile data is a quintessential ingredient for the conduct of appropriate monetary and fiscal policy. For instance, the RBI considers both inflation and growth data while taking a decision on the rate cut/hike. If the data is misinterpreted, the pulse of the economy is not correctly reflected and that would prevent the Central Bank from taking an apt decision.

Similarly, GDP data is also important in the conduct of fiscal policy. It should be noted that the Fiscal Responsibility and Budget Management (FRBM) targets are reported as a percent of the GDP. If the GDP data is not estimated accurately, the whole budget math would be affected. For instance, even if the government succeeds in achieving the FRBM targets, in reality it won’t be so. The overestimation of the GDP and with fiscal deficit targets fixed as percent of GDP, the economy would be actually experiencing a loose fiscal policy. In reality, fiscal deficit as percent of GDP would be a much higher number. Credible data is important for the government to implement sound policies and initiate various reforms, and there is a need to work towards this end.

[1] Electricity consumption, 2-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, index of industrial production (manufacturing), index of industrial production (consumer goods), petroleum consumption, cement, steel, overall real credit, real credit to industry, exports of goods and services, and imports of goods and services.

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