Arvind Subramanian's claim on overestimation of GDP is exotic research confined to shelf; CSO should focus on improving robustness of data

It was expected that the Economic Advisory Council to the Prime Minister (EAC-PM) would rebut the conclusions drawn by the former Chief Economic Adviser (CEA) Arvind Subramanian on India’s growth numbers as was depicted by the Central Statistics Office (CSO) all these years. That is the job of the PMEAC and hence the concerted discourse on each point is convincing. It has criticized the author for relying more on private estimates rather than the official CSO data.

To begin with, the former CEA’s paper on gross domestic product (GDP) growth numbers has to be looked at as being an academic exercise and ideally, the value added should remain confined to pure research. Nowhere in the world does one sit back at the table and calculate GDP for a country based on a set of variables put in an econometric model without any ground level data being used. If it were a simple job that can be attained through modelling, there would be chaos as different researchers will have their own well-defined models to arrive at GDP growth numbers.

We can see the chaos when we look at myriad forecasts put out by different forecasters on any economic variable. Everyone has their model which gives different numbers. It is just like stock predictions where everyone uses the same technical analysis tools and has different predictions.

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What is significant or disturbing about the former CEA’s revelation is that it throws a lot of doubt on the establishment’s credibility as the CSO is considered to be an official agency. Data coming from this organisation has been respected all through. The new methodology using 2011-12 as base year raised eyebrows as the numbers did not seem to gel with the ground reality. There is nothing amiss here as rarely will one see a one-to-one correspondence between the two.

The back series that was attempted came in two versions which were contradictory and hence opened the doors for political intervention and mileage. Subsequently, the revised GDP growth numbers for the last two years, i.e. FY17 and FY18 got reversed and changed the narrative of how the economy had progressed. Now, when a former member of the establishment comes up with a revelation that says that the CSO has been consistently wrong, it affects the credibility of the reign.

File photo of Arvind Subramanian. Image courtesy: PIB

The ‘author of the revelation’ more than the ‘revelation’ has to be taken seriously as it is also representative of the credibility of the government and its institutions.

The model used by the former CEA can be questioned as can be done for any research. Using 17 sectors for calculating GDP growth is too simplistic. It is incomplete as it does not include agriculture or the government’s role in the form of taxes or expenditure. Also given that the Indian economy is largely unorganised and not amenable to statistical representation, models cannot be run without accommodating this segment which accounts for around 45-50 percent of the entire economy. Doing any GDP estimation without looking at the household and small and medium enterprises (SME) enterprises is a serious lacuna. Data is not available easily and proxies have to be used.

How does the former CEA reach his conclusion? Data on these 17 variables are supposedly received independently from non-CSO sources (there can be an error here as the Index of Industrial Production (IIP) is calculated by the CSO). There is some information taken from the Centre for Monitoring Indian Economy (CMIE) which is a private agency and quite credible an institution. These variables are used to calculate GDP growth and up to 2011 matched the CSO numbers. This was tested in parallel with other countries too. Now post-2011-12, there were deviations which averaged 2.5 percent lower than what the CSO stated. Therefore, the conclusion drawn is that there is an overstatement made by the CSO all these years. The conclusion is politically neutral as this regime includes both the governments. Curiously all these variables are already part of the CSO’s calculation of GDP!

While the EAC-PM’s umbrage is palpable as the government has stated all through that the economy was doing very well all these years and the revelation of former CEA is contradictory, the CSO’s approach cannot really be questioned. It is a global methodology that is being followed and cannot be strictly compared with earlier years. Now, it is also true that the CSO relies heavily on data from Ministry of Corporate Affairs (MCA) as information on companies is used for calculating value-added which enters various components of GDP and that this database has several lacunae. In the earlier dispensation, data from the Annual Survey of Industries (ASI) was used which was probably more representative. By using MCA data which will never be up-to-date, there is a high scope of error. This definitely needs a relook as there could be some element of overstatement involved when using such data.

Therefore, there is no questioning the CSO on improving the quality of data being used for calculating GDP. But fundamentally it is hard to digest the fact that merely because a model uses a limited set of variables to calculate GDP growth is something worth considering. This is especially so as it is too facile an exercise and excludes major sectors.

Such revelations from the former CEA could affect the brand of such personnel because the statements made earlier when in office on the state of the economy were very different. So, one would ask the question as to which of his stances are actually right. In fact, there have been other economists who have used their models to calculate GDP growth in the year of demonetisation and have shown negative numbers. They have not been taken seriously so as to hit the headlines and have been confined to the research shelves. This probably should also be done to the latest research paper by the former CEA. The CSO should work on improving the robustness of its data but need not take this discussion too seriously.

(The writer is chief economist, CARE Ratings)