Former Chief Economic Advisor Arvind Subramanian has joined the growing chorus of economists who believe that the recent growth numbers are exaggerated. This should persuade the Centre to finally acknowledge the seriousness of the problem, rather than remain in denial, or worse still resort to counter-attacks as in the past. Subramanian is not exactly a “committed contrarian”, even if he is an ‘America-based economist’. In his paper ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms and Implications’ (Harvard University), he has rightly argued that the debate is too important to be reduced to a slanging match over the economic performances of the UPA and the Modi governments. The change in methodology (switch to 2011-12 as base year and a switch from volume-based to value-based estimates in manufacturing) began during the term of the former. Intuitively, a change of base year alone can change only the level of GDP but not the growth rates. The new methodology, in Subramanian’s view, has led to an overestimation of growth rates between 2011 and 2017 “ by about 2 ½ percentage points per year in the post-2011 period...That is, instead of the reported average growth of 6.9 per cent between 2011 and 2016, actual growth was more likely to have been between 3 ½ and 5 ½ per cent. Cumulatively, over five years, the level of GDP might have been overstated by about 9-21 per cent.” The new estimates, the paper says, “bumped up significantly the growth numbers for 2013-14, the last year of the UPA-2 government”. The paper is dismissive of the high growth rates during 2016 and 2017 “when the adverse impacts of demonetisation and GST were greatest”.

The crux of his argument is that recent GDP growth is not reflected in the performance of physical indicators such as vehicle sales, freight traffic, commodity consumption, credit growth, exports, imports and investment. Unless there is a spurt in productivity, a flat trend in input growth cannot explain high output growth — notwithstanding the effects of the digital revolution.

The Centre should set up an independent, credible panel of experts to look into the data quagmire. As the paper explains, “if the new evidence is right, it would imply that both monetary and fiscal policies over the last years were overly tight from a cyclical perspective”. Less than credible numbers are likely to impair investment decisions. It also implies that the policy focus should return to restoring growth per se. If real growth has been overestimated by using wrong price deflators for value-based estimates (particularly for inputs), nominal growth rates could be inaccurate on account of other factors, such as informal sector output estimates. Getting the latter wrong could throw key parameters such as the fiscal deficit and debt to GDP ratios out of gear, impacting Budget-making. Setting aside prestige issues, the Centre must act credibly, and quickly.

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