Fixing India’s broken growth barometer key to revival5 min read . Updated: 25 Jul 2020, 11:06 AM IST
Many indicators suggests that the Indian economy slowed down significantly in the wake of the global financial crisis but the GDP data paints a dramatically different picture
After being conferred the first P C Mahalanobis Award in Official Statistics for lifetime achievements by India’s statistics ministry a few weeks ago, former Reserve Bank of India Governor, C. Rangarajan had one big message for his hosts: end the controversy around GDP calculations.
When it was first released in 2015, several economists and government officials had expressed bewilderment at the dissonance between the new GDP numbers and other macro-economic indicators. Since then, the dissonance has only grown.
The great Indian GDP paradox
The GDP series suggests that India’s economic boom in the 2005-11 period continued at a nearly identical pace in the 2012-18 period at just above 7%. Almost all other indicators of economic activity suggest otherwise. Bank credit, for instance, grew at a real (inflation-adjusted) rate of 15% per annum in the pre-2011 period. The pace slowed dramatically to 4 percent per annum in the post-2011 period. The fall in credit growth mirrors the slowdown in investment projects under implementation, as recorded by the Centre for Monitoring Indian Economy (CMIE).
Factory output, as recorded by the Annual Survey of Industries (ASI), saw a deceleration from 9% growth per annum in the pre-2011 period to 2% in the post-2011 period. The latest National Sample Survey (NSS) consumption report shows that rural consumption actually declined at an annual pace of 1.5% in the post-2011 period after growing at 3% in the pre-2011 phase. The ministry buried the consumption report, citing divergence with GDP growth figures. But as the accompanying charts show, the GDP growth numbers are the real outliers.
Even wage indicators have seen sharp deceleration in recent years. An analysis of the Periodic Labour Force Survey (PLFS) data for 2017-18 by the economists Ravi Srivastava and Balakrushna Padhi shows that wage growth for informal workers (casual labourers) decelerated from 8% in the pre-2011 era to 2% in the post-2011 period. Salaried and urban workers were hit the hardest in the post-2011 period, they wrote in an Institute of Human Development (IHD) working paper published earlier this year.
The wage bill of factories declined sharply in the post-2011 period, and so did the wage bill of non-financial services firms for which CMIE compiles data. Other indicators of economic activity have also shown a marked deceleration in the post-2011 period, as shown by India’s former chief economic adviser, Arvind Subramanian in a July 2019 Harvard University working paper.
To be sure, the data presented here should not be seen as evidence that everything went downhill since 2011. Factory jobs and wages, for instance, decelerated in the 2011-13 years before showing a modest recovery in the 2014-18 period. Yet, the pace of recovery has been very slow, which means that the 2012-18 period taken as a whole has seen a much more modest pace of growth as compared to the 2005-11 period. This is true of several other corporate indicators as well.
So, what explains the dissonance between these indicators and the controversy-ridden GDP series?
Several researchers have made valiant attempts to study this question over the past five years based on the limited public disclosures on the GDP calculations, and come up with some plausible answers.
A shiny new database goes wrong
The roots of the GDP measurement controversy lie in the use of a relatively new corporate database, MCA-21, in national accounts, according to several economists. Even in 2015, the manner in which the MCA-21 data was plugged into the national accounts had raised questions. A 2018 National Statistical Commission (NSC) report found ‘serious inconsistencies’ in the database. The controversy blew up last year, after an NSS report showed that many firms listed in the database either could not be traced during field visits, or were mis-classified.
The revelations kicked up a data storm last May, and led to ‘clarifications’ from the finance ministry and the statistics ministry. These clarifications suggested that the infirmities in the database may have led to errors in estimating the share of different sectors in the overall GDP pie because of the mis-classification problem (classifying manufacturing firms as services, for instance) but the impact on the aggregate GDP numbers was minor. But the clarifications failed to satisfy independent researchers, and left several questions on the use of the database unanswered.
The clarifications have only raised ‘further doubts’ on the sample of companies being used for GDP estimation, wrote the economists R Nagaraj, Amey Sapre, and Rajeswari Sengupta in a July 2019 research paper.
The methodology used by the statistics ministry to account for missing data on firms may be over-estimating growth, they argued in the paper.
“It is now beyond doubt that there is a serious flaw in the way the MCA-21 data was used for estimation of various aggregates," wrote former NSC chief, R.B. Barman in an Economic and Political Weekly article published earlier this year.
Heroic assumptions, imprecise methods
National account experts have also raised questions on several new innovations in the new GDP series such as the use of data from ASI’s quasi-corporate firms to estimate informal sector growth, which could be bumping up growth estimates.
The earlier GDP series also relied more on volume indices to capture growth. This made the task of estimating real (inflation-adjusted) growth easier. The shift from a volume-based to a value-based approach in the new series necessitated the use of deflators for each sub-sector to separate the rise in output (real value-added) from the rise in prices of each product category. In the absence of a producer price index, the ministry has relied largely on the sub-components of the wholesale price index (WPI) to deflate the value-added by each sub-sector of the economy. The use of the WPI has inflated real growth rates in many sectors at a time when commodity prices were falling, Sengupta has argued in her writings. If CPI-based deflators, which are more appropriate for GDP computations are used instead, it could bring down growth rates by a couple of percentage points, she wrote.
The mis-classification issue only adds to the deflator tangle. Since firms which are listed as manufacturing firms in the MCA-21 database may in reality be services firms and vice-versa, the output of many services firms may be getting deflated using manufacturing-sector deflators.
The accurate estimation of GDP is important for all stake-holders --- consumers, investors, and policy-makers. To agree on the right remedies for India’s economic weaknesses and to take the right decisions, we must first all agree on the extent and nature of the issue.
The statistics ministry would do well to heed Rangarajan’s words and settle the GDP debate once and for all. The most effective step in this process would be to release a detailed hand-book on sources and methods for the GDP computation methodology (as was done for the 2004-05 series database, so that it may be vetted by independent researchers. Only then would the controversy end.
This is the second of a four-part series on India’s growth challenge. The first part examined how three decades of rapid growth have transformed the country