New Delhi: Former chief economic adviser in the finance ministry Arvind Subramanian, in a follow-up GDP paper, has given further evidence that real GDP growth in the post-2011 period may have been overestimated by 2.5 percentage points, as argued in his earlier paper.
Countering the contention of prime minister’s economic advisory council (PMEAC) that growth could not have declined since India’s tax-GDP ratio rose in the post-2011 period, Subramanian in his latest GDP paper has argued that real growth in direct taxes actually fell from 14.3% pre-2011 period to 3.7% during post-2011 period.
PMEAC had argued that Subramanian had overlooked taxation data in his earlier analysis. "While selecting 17 indicators, the author chooses to overlook tax data. Unlike many indicators, tax data is not collected through surveys or by agencies through arcane techniques, these are hard numbers and should be an important indicator of growth. Further, there have been no major changes in tax laws until the end period in the author’s analysis (31st March 2017). GST was introduced on 1st July 2017. The author’s logic of not using tax data appears to be a convenient argument meant to avoid inconvenient conclusions based on hard facts," the council had said.
Subramanian in his initial paper had said he is not using tax indicators because of the major changes in direct and indirect taxes in the post-2011 period which render the tax-to-GDP relationship different and unstable, and hence make the indicators unreliable proxies for GDP growth.
To counter the PMEAC argument without naming it, Subramanian in his follow-up paper has analysed the tax data.
"Another counter-argument is that growth could not have declined, since India’s tax-GDP ratio rose in the post-2011 period, from about 10% in 2011-12 to 11% in 2016-17. After all, revenue performance tends to be pro-cyclical, so rising revenue-GDP ratios tend to suggest surging growth," Subramanian observed.
Subramanian said much cannot be inferred about GDP growth from indirect taxes since after international oil prices fell, the government raised excises on petroleum sharply, which increased revenues and hence the petroleum tax-GDP ratio by about 0.8 percentage points of GDP between 2011-12 and 2016-17.
However, when he analysed trends in direct taxes, he found nominal taxes grew at about 22% pre-2011 and dropped sharply to 11.5%, post-2011; the corresponding real growth numbers are 14.3% and 3.7%. "So, the sharp decline in real direct tax growth is striking," he said.
"Again, we must be careful here because a lot could have changed by way of tax rates and enforcement to explain the change. But sharply declining real direct tax growth is more likely to be consistent with declining real GDP growth. Indeed, the slow pace of real direct tax growth during 2012-16 seems consistent with a real GDP growth rate of 4.5%," he concluded.
Subramanian also checked by examining whether other countries have managed to achieve 7% GDP growth, over any 5 year period, with India’s post-2011 combination of investment and export growth (3% for both). "We went back to 1980 and identified 69 country-year experiences where the average growth rate over 5 consecutive years was between 6.5% and 7.5%. The answer is: none. Indeed, the median combination of investment and exports necessary to achieve 7% growth is 11.8% and 9.8%, respectively, more than three times India’s performance on. So, historical evidence from other countries does cast doubt on the post-2011 GDP growth estimates," he said in his latest paper.
Subramanian also claimed that he analysed over 28 countries since 1980 where both investment and export growth rate are close to or above India’s combination of 3.2% and 3%, respectively.
"No country case ever achieved any growth greater than 5.5%, consistent with our result that the 95% confidence interval is below 5.5%. Four countries in this sample achieved growth averaging 4.9%, but the median growth was only 3.22%. So, if India were a typical country with typical relationships between investment, exports and GDP growth, its GDP growth would be closer to 3-3.5%," he concluded.