Is India overestimating its economic growth? -TCA Sharad Raghavan
The new GDP series has some methodological and sampling problems
Former Chief Economic Adviser Arvind Subramanian recently claimed in a paper that India’s GDP growth from 2011-12 to 2016-17 was likely to have been overestimated. The Prime Minister’s Economic Advisory Council has rejected this claim, stating that his paper would “not stand the scrutiny of academic or policy research standards”. In a conversation moderated by T.C.A. Sharad Raghavan, Pronab Sen and R. Nagaraj discuss the methodology in calculation of GDP growth. Edited excerpts:
* Professor Nagaraj, was economic growth overestimated from 2011-12 to 2016-17? If so, by how much? In other words, which is more accurate: 7% growth, as estimated by the government, or 4.5%, as estimated by Dr. Subramanian?
R. Nagaraj: Ever since the 2015 GDP rebasing, there have been many concerns about the veracity of the GDP estimates. With the debate progressing, more and more issues have come to light. Many of us who have intervened in this debate have looked at the specific issues with the revised methodology and revised databases. And we have been trying to say how these could have affected the output estimates.
However, most critics have refrained from giving an alternative estimate given the complexities involved in the changes in the methodology and databases used. Therefore, most of us have only pointed out the problems with the methodology and the database, but have refrained from giving an alternative estimate of the GDP. We all agree that there is an overestimate, but by how much is something that we have refrained from estimating.
Dr. Subramanian has given a very drastic estimate. He has said that GDP growth was 4.5% per year for six years from 2011-12. This is less than the official estimate by 2.5 percentage points, and has caused a lot of uproar in the media. Whether GDP growth was really lower by 2.5 percentage points, or lower by less than that or more than that, is something we are unable to be very specific about. This is because the methodology used by Dr. Subramanian can be questioned on many grounds. He has not addressed the methodological issues, but he has used the covariates of GDP and a regression methodology to arrive at this alternative estimate.
Therefore, this number, though it is drastic and catches public imagination, can be questioned on many grounds. That’s the reason why there has been a lot of scepticism. If you ask me whether I agree with him, I won’t comment because I really don’t know. Unless I go into the details of the methodology, I would not be able to assess the merit of his claims. But what I would definitely say is that the growth rate seems overestimated. But by how much, I would not be able to give you an alternative number.
* Dr. Sen, would you agree that growth is overestimated? And if it is, do you think it is by an amount that should be taken note of?
Pronab Sen: I don’t even know whether growth is overestimated. This is a technical debate. It is a debate where people like Professor Nagaraj, who are critics, have written papers and the CSO [Central Statistics Office] has formally replied to them. It is a technical debate and it is healthy.
The real issue is that most of them really say nothing about how the growth rate will be affected. The question that is being asked is whether the level of GDP was overestimated or not. So, when Professor Nagaraj says that there was an overestimation, my sense of the criticism that he and others have levelled seems to suggest that they are really talking about the levels and not the growth rate. I don’t think one can make a categorical statement about the growth rate.
Dr. Subramanian’s paper is a different matter altogether. What he has done is that he has taken 17 indicators and found that they were very closely correlated with the GDP in the first period, that is, prior to 2011-12, and that most correlations broke down in the second period. This does not come as a surprise because a lot of the indicators that he has taken were used earlier in calculating GDP. They are no longer used now.
When we use the corporate value figures now, that relationship seems to have broken down. Then he assumes that that relationship, had it continued into the second period, would have given a 4.5% growth, and then says that therefore there is a 2.5 percentage points overestimation. That is conceptually wrong. I don’t think it stands scrutiny theoretically.
He then does a cross-country regression and shows that India was pretty much on the average of 70 countries in the earlier period. But in the second period, India is off. There are two problems with that argument. One, in the cross-country regression that he does, he doesn’t give us the confidence interval because we know you are not going to all be on a straight line. You are going to be off it by a certain amount and so there are confidence intervals. He has not actually told us whether in the second period we are beyond, outside the confidence zone. Until that information is given, we cannot say that it is an outlier.
Two, what he should have mentioned is that almost all the countries in the 70 he has used are using volume indicators to calculate their GDP. And in doing that, they would be closely correlated with what we were doing earlier because we were also using volume indicators and would not be correlated in the second period.
So, I think there are issues. Whether growth was being overestimated or not... my sense is that growth was not being overestimated earlier. That is, up to 2016-17. Subsequent to that, I think it is being overestimated. But by how much, I have no call.
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