Former CEA Arvind Subramanian defends controversial argument on GDP overstimation

After stirring up a controversy last month over India’s economic growth rate between 2011-12 and 2016-17, former Chief Economic Advisor Arvind Subramanian has stuck to his previous stand on the GDP overestimation, according to media reports. Speaking at Delhi-based economic think tank on Wednesday held at the National Council of Applied Economic Research (NCAER), Subramanian defended his findings in a research paper but clarified that he used a framework “not to estimate but validate" the Gross Domestic Product (GDP) growth estimates from the demand side, reported Mint. Some key macro-economic shocks after 2011 like a decline in exports, twin balance sheet crisis, policy paralysis during the Manmohan Singh government’s second term, severe and consecutive droughts, and demonetisation in 2016, lead to major macro engines to stall, Business Standard said quoting the former CEA. [caption id=“attachment_4326481” align=“alignleft” width=“380”] File image of former CEA Arvind Subramanian. Reuters.[/caption] Last month, Subramanian, Narendra Modi government’s former CEA, had opined that India’s economic growth rate had been overestimated by around 2.5 percentage points between 2011-12 and 2016-17 due to a change in methodology for calculating GDP. India’s GDP growth rate between this period should be about 4.5 percent instead of the official estimate of close to 7 percent, he said in a research paper published at Harvard University. “India changed its data sources and methodology for estimating real GDP for the period since 2011-12. This paper shows that this change has led to a significant overestimation of growth,” he said in the paper. “Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7 percent. We estimate that actual growth may have been about 4.5 percent with a 95 percent confidence interval of 3.5 - 5.5 percent,” he said. Manufacturing is one such sector where the calculations have been largely mismeasured, wrote Subramanian, who quit as the CEA in August last year before his extended tenure was to end in May 2019. He said the implication of this is: “Macro-economic policy too tight. The impetus for reform possibly dented. Going forward, restoring growth must be the highest priority, including to finance government’s laudable inclusion agenda. GDP estimation must be revisited.” In May this year, official data had shown that economic growth slowed down to a five-year low of 5.8 percent in January-March, pushing India behind China, due to poor showing by agriculture and manufacturing sectors. The Bharatiya Janata Party (BJP) government had in January 2015 updated base year for GDP calculation to 2011-12, replacing the old series base year of 2004-05. Using this, in August last year the growth numbers were recalibrated by the Sudipto Mundle Committee set up by the National Statistical Commission. This dumped up growth during the Congress-led United Progressive Alliance (UPA) years based on the so-called production-shift method. — With PTI inputs