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NSSO report confirms critics were right on GDP fiasco; distortion of data will be economic suicide

Ever since the new GDP series was introduced in the early years of Narendra Modi-led government’s rule, there were questions about the accuracy of the gross domestic product (GDP) numbers and its significant disconnect with a number of high-frequency macro economic indicators on the ground.

This was, however, only a suspicion and matter of academic debate. The criticism on the GDP numbers almost always turned political with the critics being rubbished by the Central government and the Central Statistics Office (CSO). No introspection into the likely lapses in the GDP data calculation process was initiated by the CSO, the topmost government agency in charge of official data handling. Instead, it kept on defending the flawed methodology.

Now, a study conducted by the National Sample Survey Organisation (NSSO), presents hard evidence to establish that there was a serious problem with the GDP calculation. The NSSO study, first reported by Mint, presents a disappointing picture of how shoddily the CSO has been handling the critical task of compiling national income figures in Asia’s third largest economy.

According to this, 36 percent of companies that are part of MCA-21 database of companies and are used in India’s GDP calculations could not be traced or were wrongly classified.

 NSSO report confirms critics were right on GDP fiasco; distortion of data will be economic suicide

Representational image. Reuters.

To quote from the NSSO survey, “Out of the 39 percent out-of-survey units in MCA, 21 percent were found to be out of coverage and another 12 percent were non-traceable (which in number is nearly 4000 units). In case of EC and BR frames, nearly 6 percent and 14 percent were out of coverage respectively even though there were updations of these two frames.”

Now, MCA-21 is an important data base which is used in the calculation process of GDP numbers. Around 4,000 units were non-traceable, which, in simple language means CSO was imagining output data from these non-existent firms (either shut down or non-existent) to calculate the GDP growth. In other words, a good part of the work involved in the GDP compilation process was fictitious.

How did it impact the overall outcome?

In NSSO’s words, “Non-response rate as a result of limitations of frame was about one-third of the sample enterprises. This is a significant loss of representativeness of the sample. When the geographical domains (state/UTs) or enterprise activity domains are considered, the non-response rates vary extensively over the domains. The estimates from the sample are, therefore, not likely to be robust over the domains.”

All this means, now we have crucial evidence that the GDP data is not reliable and India’s data credibility has taken a major hit in front of the world which will have a cascading impact on investor sentiments and the way multilateral agencies look at India’s official figures.

In fact, the doubts on India’s GDP numbers were existing already.

Some time ago, International Monetary Fund’s (IMF) chief economist Gita Gopinath, had said India should 'transparently communicate' growth statistics.

“India is projected to be growing over 7 percent both in 2019 and 2020 which makes it one of the fastest growing large economies of the world, which is why it is even more important that the statistics coming out of India are transparently communicated because everybody is watching India at this point” said Gopinath in an interview given to CNBC. Gopinath isn’t the first high profile international economist to raise the transparency issue.

With the NSSO survey pinpoints the misrepresentation of data by CSO, there are more grounds for suspicion on India’s numbers. That, of course, is no good news for the country. It needs to fix the transparency issue and get the credibility back. The world doubting India’s growth numbers could be even more damaging for the Indian economy than facing criticism on failing to bring back the growth momentum.

Not just the GDP figures, even the unemployment figures or the lack of it had posed a question mark on the credibility of India’s official data and chances of political interference in data management. In March this year, a group of 108 economists raised an alarm over the political interference in the official statistics.

The group appealed to economists, statisticians and independent researchers to come together to raise their voice against the tendency "to suppress uncomfortable data" and impress upon the government to restore access and integrity to public statistics and re-establish institutional independence.

The gross errors introduced in India’s GDP calculation need to be probed thoroughly by an independent agency to understand how these discrepancies happened in the first place. Even before that the problematic GDP methodology needs to be scrapped and new methodology needs to be worked out to regain public trust.

The NSSO deserves kudos for flagging an important gap in the MCA-21 data base. If this discrepancy is taken lightly or corrective measures are delayed, this can permanently damage India’s data credibility and set a bad precedence even for future governments.

(Data contribution by Kishor Kadam)

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Updated Date: May 08, 2019 18:08:07 IST