BackA credibility deficit in statistics
India's statistical agency is well-regarded not only in India but also internationally, but the new GDP numbers pose a serious challenge to its credibility
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The Central Statistics Office (CSO) released its estimate of gross domestic product (GDP) on 29 May. This is the first estimate for a full year after the National Democratic Alliance (NDA) took over. The growth rate of GDP at 7.3% at constant prices is not only better than the last year of the United Progressive Alliance (UPA) but also makes India the fastest growing economy in the world. At a time when the world economy is showing signs of slowing, the performance of the Indian economy judged by these numbers should be cause for cheer. The fact that India’s economy grew faster than China’s may give the impression that all is well, despite fears of rural distress across India.
Unfortunately, nobody seems to be happy with these numbers. Not only has the Reserve Bank of India (RBI) raised the red flag doubting these numbers in its policy review, even the finance ministry has advised caution while interpreting these numbers. The International Monetary Fund (IMF) has decided to send a team to understand the new GDP numbers put up by the CSO. Even the financial media, which should have lapped up these numbers, has shown maturity while reporting them.
India’s statistical agency is well-regarded not only in India but also internationally, but the new GDP numbers pose a serious challenge to its credibility. While the CSO did bring out an explanatory fact sheet, thus far, its attempts to explain these numbers have not worked—partly because the explanations have been largely in terms of accounting and the arithmetic of national accounting, with very little clarity on the nature of changes and the sources of divergence between the new series and the old series.
It is not the arithmetic that is being questioned; the very basis of growth that seems to be at variance with the optimistic picture being presented by the national accounts. The high growth rate of GDP is attributed largely to the better-than-average performance of services and manufacturing with agriculture, mining and construction showing deceleration. The growth rate of manufacturing at 7.1% is not only at variance with the growth rate of Index of Industrial Production (IIP) at 2.3% but is also at variance with the reported sales of automobiles, tractors and many other manufactured goods, all of which show deceleration in sales and production. For the record, sales of commercial vehicles last year declined by 2.8%.
Even for the services sector, the growth rates appear far too optimistic. Profits of companies do not reflect this optimism; nor do sales figures, which are subdued compared with the numbers reported in the national accounts estimates. Other data, such as exports and investment data, are also at variance with the rosy picture presented by the CSO. Clearly, there is something missing as far as the GDP numbers are concerned. Quite simply, the whole is not the sum of parts as expected in an accounting sense.
One of the reasons offered by the CSO for the variance has been the change in methodology of arriving at these numbers. To keep up with international practices, the CSO changed the methodology of computing GDP and its aggregates. As a result, the manufacturing growth rate, which was earlier based on the IIP and the Annual Survey of Industries (ASI) data on volume and value-added growth, now also takes into account the advance tax filing data maintained by the ministry of corporate affairs (MCA). This practice of using tax data extends to the services sector as well, unlike the earlier series which used volume-based indices.
While the new series may be consistent with the best practices adopted internationally, doubts remain. These are not only related to the conceptual framework for measuring growth in sectors and sub-sectors of the economy but also to the coverage of the MCA database. This is particularly a problem of developing countries, where the informal/unorganized sector still constitutes a large part of the economy. Serious questions have also been raised by Prof. R. Nagaraj—a member of the committee which recommended the use of MCA data—not only on the completeness of the data but also the methodology adopted to blow up the estimates.
It is obvious that the new series raises far too many questions than it has answered so far. A reasonable approach to such drastic changes would have included a wider discussion among the academic community as well as media dissemination before the new series was adopted. By maintaining secrecy on these, the CSO has not only messed up its communication strategy but also done considerable damage to its credibility.
The matter is not only about statistical methods and estimates. The issue of national accounts is also fundamental to the understanding of what is happening to different sectors of the economy and the way different sectors respond to various policy measures. A discredited database not only does injustice to the statistical system of the country but also hinders policy response needed for long term growth by giving mixed signals.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.
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