India may not be the "fastest growing economy" in the world after all.
The Prime Minister's Economic Advisory Council (PMEAC) has come out strongly against former chief economic adviser Arvind Subramanian's new research paper on India's GDP figures, referring to parts of it as a "most unusual exercise".
"Evidence 3. In cross-country regressions, India has a normal relationship b/w growth in standard indicators and GDP pre-2011, but post-2011 it is an outlier (growth much greater than predicted by relationship)". One of the key adjustments was a shift to financial accounts-based data compiled by the Ministry of Corporate Affairs, from volume-based data previously. Apart from that, while GDP measurement was calculated via factor costs, it was changed to calculating via market costs.
At the time, this move was welcomed as it was said to be more in line with global practices and gave a better picture of economic activity.
"This paper shows that this change has led to a significant overestimation of growth".
India's GDP growth rate between this period should be about 4.5 per cent instead of the official estimate of close to 7 per cent, Narendra Modi government's former CEA said in the research paper, published by the Center for International Development at Harvard University. The paper comes amidst controversy over the country's economic growth under the new GDP series. "A variety of evidence suggests that the methodology changes introduced for the post-2011 GDP estimates led to an over-estimation of GDP growth". The new methodology deflated the value of input values by output prices, which overstated manufacturing growth. "The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer", he says in the paper.
He said if statistics are potentially misleading about the overall health of the economy, they influence the impetus for reform in serious and perverse ways. Had the growth been what Arvind's estimates show, policy action could have been a lot different.
What can be done now?
"Going forward, there must be both the urgency from the new knowledge that growth is weaker-than-believed and the re-embrace of growth as necessary to accomplish other objectives", the paper says.
"India must restore the reputational damage suffered to data generation in India across the board, from GDP to employment to government accounts", Subramanian said.
This, he believes, can be done by appointing people with stellar technical and personal reputations.
He has also suggested that the GDP estimation be revisited by an independent task force comprising national and worldwide experts, statisticians, macro-economists and policy users.
Arvind stresses in his paper that the overestimation is not political.
The work was carried out by statisticians and technocrats and only completed in late 2014, which was after the NDA-2 government came into power.
Stating that his research paper by no means was the final word given the impossibility for researchers to reproduce the detailed methodology underlying the GDP estimates, he said, "That said, the evidence is too broad and robust, the anomalies and puzzles too numerous, the magnitudes of over-estimation too large, and the stakes for the economy and country too high for this evidence not to be debated seriously".