India’s initial GDP estimates often underestimate actual growth

Mumbai: The accuracy of India’s official GDP statistics could improve if they make use of high frequency indicators such as vehicle sales, air passenger traffic and foreign tourist arrivals, according to a new study by Anupam Prakash and others from RBI’s Department of Economic and Policy Research. Their analysis found that the initial estimates of gross domestic product (GDP) or gross value added (GVA) often underestimate actual growth. Consequently, subsequent estimates mostly result in upward revisions, as they benefit from more comprehensive data. Also, the initial estimates are poor at capturing significant turns in the economy. For instance, initial estimates had underestimated growth in 2005-06, a good year, while they had overestimated growth in the year of the global financial crisis, 2008-09, leading to a sharp subsequent downward revision that year.

Also read: Examining Gross Domestic Product Data Revisions in India

Falling economic growth in USA is rooted in many long-term factors rather than simply being a case of slowing productivity growth, according to a new paper by Robert J Gordon, professor of the social sciences at Northwestern University. Average GDP growth in USA fell from 3.2% per year in 1970-2006 to 1.4% during 2006-16. A large part of this decline is on account of long-term changes such as fall in population growth, a rise in mortality rates for certain population groups, fall in immigration, and a weaker rate of improvement in life expectancy compared to other developed countries. A fall in labour force participation, partly a result of retirement of the baby boom generation, has also dented US economy’s ability to grow. Meanwhile, the premium associated with college education has declined in recent years while the cost of higher education has risen. Associated indebtedness had led to student dropout, lower rate of new business formation and delay in setting up of households.

Also read: Why Has Economic Growth Slowed When Innovation Appears to be Accelerating?

The 2014-16 oil price collapse was caused mostly by an increase in US shale oil production led by efficiency gains, according to a study by World Bank senior economist, Marc Stocker, and co-authors. However, this supply factor only played a key role during the early period of the crisis. Later, the price slump continued because demand weakened owing to feeble economic growth worldwide. The benefits of the price slump could not be fully realized by the global economy for various reasons, such as economic rebalancing in China, US dollar appreciation, contraction in US energy investment as well as weak response to the price weakening by oil importing countries. The price collapse forced oil exporting countries to initiate long-awaited reforms, such as economic diversification and reducing costly energy subsidies.

Also read: The 2014–16 Oil Price Collapse in Retrospect

Population diversity raises the risks of armed conflict within a nation or geography, according to a new paper by Oded Galor, professor of economics at Brown University, and co-authors. By diversity, the authors not only refer to the presence of different ethnic groups, but also to genetic diversity within ethnic groups. They analyze 143 countries over the period 1960–2008 and find a significant link between diversity and outbreak of conflict. They extend their analysis back in time to the period between 1400 and 1799 and find similar results. They argue that population diversity adversely affects interpersonal trust, leading to differences in choice of public goods and government welfare programmes, and also impacts the intensity of polarization across ethnic, linguistic and religious groups.

Also read: Diversity and Conflict

Acquiring a new firm can help a company reap significant benefits from post-acquisition accounting rules, according to an article in the London Business School (LBS) Review by Aleksander A. Aleszczyk, a doctoral student at LBS, and co-authors. Post-acquisition adjustments often lead to an increase in the reported value of the acquired firm’s assets as they are consolidated with those of the acquiring company. The authors find a 43% increase in the value of fixed assets on average, despite the fact that there is no real change in the acquisition target’s business or income. This increases the potential value of the collateral available for borrowing. The researchers found that a larger collateral base was associated with larger loans that could be availed at lower rates and extended for longer periods.

Also read: Accounting for takeovers

Economics Digest runs weekly, and features interesting reads from the world of economics.