India may have undestimated the impact of the twin balance sheet problem on its economic growth, former chief economic adviser in the finance ministry Arvind Subramanian said on Wednesday.
Elaborated in his Economic Survey 2016-17, the twin balance sheet problem refers to the ballooning of debt on the books of corporate entities and the estimated Rs10 trillion of stressed assets that piled up at banks because of the inability of borrowers to repay.
Speaking at Delhi based economic think tank NCAER, Subramanian who courted controversy last month by claiming that India’s GDP may have been overestimated by 2.5 percentage points between FY12 and FY17 defended his findings, but clarified that he used a framework “not to estimate but validate" GDP growth estimates from the demand side.
The actual average GDP growth for the period between FY12 and FY17 may have been about 4.5%, sharply lower than the official estimate of about 7%, Subramanian argued in a paper titled India’s GDP mis-estimation: likelihood, magnitudes, mechanisms, and implications published by the Center for International Development at Harvard University.
Subramanian said India’s sustained high GDP growth post 2011 despite large negative macro-economic shocks, unlike large emerging economies. He estimated pre-2011 and post-2011, investment, exports, imports, credit fell by 9.5 percentage points, 12.1 percentage points, 17.4 percentage points, 10.1 percentage points respectively, though GDP growth was only impacted by 0.8 percentage points. When asked why he did not answer to the rebuttal of his paper by the Prime minister’s Economic Advisory Council, Subramanian said: My objective is not to rebut anyone. The consequences of ignoring the issue at hand is huge."
The PMEAC last month argued that Subramanian has cherrypicked a few indicators for his analysis and that the new GDP series was a far better reflection of reality than the old series. Replying to the paper presented by Subramanian, former chief statistician of India Pronab Sen argued that relatively rapid technological advancement and growth in real wages could explain the overestimation that Subramanian is getting through his demand side analysis.
Subramanian said the 4.5% average growth between FY12 to FY17 is good enough and could even make India the second fastest growing economy among the $1 trillion plus economies. However, another former chief economic adviser in the finance minister Kaushik Basu said 4.5% growth is pretty bad for India. “At our per capita level, China was growing at 10%," he added.