Arvind Subramanian’s wisdom of hindsight on GDP numbers puts India in a tricky spot; tells us we were living an illusion

The Narendra Modi government’s former chief economic advisor (CEA), Arvind Subramanian tells us India’s Gross Domestic Product (GDP) estimates under the changed data sources and methodology since 2011-12 was a big lie. According to Subramanian — an economist of international repute and CEA who practiced notable silence on many crucial economic issues while in office — methodological changes have led to overestimating the GDP growth by 2.5 percentage points per year between 2011-12 and 2016-17 and actual growth during this period would have been around 4.5 percent. We will come to Subramanian’s reasoning a bit later. But the immediate take away from this troubling finding, which will surely have devastating consequences on India’s economy, is this: all the policy decisions, monetary or fiscal, which used the new GDP series (2011-12) as a basis, were wrong. In other words, the Reserve Bank of India (RBI)/MPC kept the interest rates significantly high relying on the assumption of highly inflated growth figures. Similarly, the fiscal decisions/assumptions/estimates were flawed too for the same reason. India was just about managing an unimpressive 4 percent growth. [caption id=“attachment_4252901” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] More worrying, India was sending fictitious growth figures to the world including multilateral agencies like International Monetary Fund (IMF) and World Bank besides economists, academics and foreign investors who were trusting India’s official growth figures for their research, academic and investment decisions. In his Indian Express article, Subramanian seems to make a disclosure that there is nothing political in India’s data mis-estimation. But, his research findings are sure to come as a major jolt for the Modi government under whom the GDP methodology was revised with the 2011-12 base. Already, the Modi government, now into its second term, is struggling to defend the declining national growth figures. Subramanian’s findings will be an egg on its face further damaging National Democratic Alliance’s (NDA) claimed record on performance on the economic front. It wouldn’t be too long before the finance ministry and the NITI Aayog launch a retaliatory attack on their former CEA with their own set of numbers. Often, India’s GDP growth pace has been compared with that of China, also the country’s status of being the world’s fastest-growing major economy. Subramanian’s GDP number tells us that the India-China comparisons were, at best, a joke. And if at all, there is a competition between the two, that would be on which economy misrepresented the national income data the most. Coming to Subramanian’s study, the economist highlights one clear parameter that smells fishy — the performance of labour-intensive manufacturing sector. This segment was a big underperformer during the wrongly estimated high-growth years. To quote Subramanian, “Before 2011, formal manufacturing value added from the national income accounts moved closely with IIP (Mfg.) and with manufacturing exports. But afterward, the correlations turn strongly and bizarrely negative.” Subramanian is spot on here. This serious disconnect with the manufacturing sector performance was evident across — in the factory output data, core sector performance and employment situation. This also answers the disturbing question — why the economy was performing so badly on the ground with unemployment on the rise even when the GDP numbers were showing India as the fastest growing economy. But remember, much before Subramanian rewrote India’s GDP figures, a host of primary indicators were silently telling us the real story that something is amiss in the economy. These include a sharp downtrend in consumer spending behaviour, India’s vehicle sellers were posting muted numbers for a while now, the IIP figures were showing a sliding pattern for continuous months, corporate earnings, especially that of fast-moving consumer goods (FMCG) companies, have been reported at multi-quarter lows and bank credit has been slowing to industries, more recently, to even retail consumers. Even the dropping WPI inflation wasn’t telling us a happy story anymore. The delayed release of India’s unemployment figures — 6.1 percent or the highest in 45-years, too told us the state of the Indian economy.

What now? Perhaps more than the concerns of slowing growth, what is probably hurting the Indian economy even more now is the widening trust deficit on the country’s official data. The loss of faith on key data published by the government has been there for a while, but India’s failing data credibility is now no longer confined to the local press but a subject the world has taken note of.

The Modi government should address the problem urgently and form a group of experts with international acceptance to take a hard look at India’s official data methodology. Till the time clarity emerges, the government must withdraw the faulty GDP data series and address the world on India’s data conundrum. Finally, Subramanian’s wisdom of hindsight also raises questions on the ability of the government economists occupying top government jobs and handling critical advisory roles to speak up at the right time, not long after they retire. Like the GDP numbers, Subramanian had also launched a scathing attack on Modi’s demonetisation decision, from a safe distance after exiting his job. It would be of tremendous benefit to the economy if its economic advisors start giving advises while holding office.