GDP vs GDP: Now, Arvind Subramanian Up Against Modi’s Economic Advisory Council

The Gross Domestic Product, or GDP, is not exactly known to evoke passion in one’s breast. Yet over the past couple of years, GDP numbers and other government statistics have occupied the front pages of newspapers and have become sources of heated debates on national TV channels — with usually mild-mannered economists trying to outshout each other.

The whole argument between economists around GDP concerns the methodology between 2 series — the old series, which uses 2004-05 as the base year, and the new series, which uses 2011-12 as the base year.

There has been a contention by many economists that the new 2011-12 series seriously overestimates India’s GDP and its growth. Their claims of overestimation have been amplified by the recently released data on very high levels of unemployment.

A paper brought out a couple of weeks ago by Dr Arvind Subramanian, who once acted as Chief Economic Adviser to the Modi government, again brought out the passions in economists — particularly those close to the Modi government. The economists of the Prime Minister’s Economic Advisory Council (EAC) have brought out a rebuttal of Dr Subramanian’s paper, which was strongly worded, but weak in argument.

Also see: Problems with the Revised Method of GDP Estimate

Like many other economists, Dr Subramanian too in his paper contends that there seem to be serious problems with the current methodology used to calculate India’s GDP, leading to overestimation of growth rates.

He estimates that the actual growth rate, between 2011 and 2017 has been at 4.5 per cent per year, instead of the 7 per cent as estimated by official statistics.

Even though Dr Subramanian’s point about overestimation of GDP growth covers the last 2 years of Manmohan Singh’s government, Modi’s economists seem particularly upset about it — probably because it puts a question mark over the Modi government’s claim of making India the fastest growing economy in the world.

One of the main points on the basis of which Dr Subramanian makes the assertion of overestimation of GDP is that many indicators like production of two-wheelers, tractors, cement and steel, railway freight, electricity consumption, imports and exports, credit, IIP manufacturing, etc — which are usually considered to be positively correlated with GDP — seem to be negatively correlated with GDP in the new series based on the revised methodology.

Further, he points out that under the Modi government, between 2015 and 2017, India’s real GDP showed an average growth rate of 7.5 per cent. But investment and exports, which are usually considered as drivers of economic growth, only grew at 4.5 per cent and 2 per cent. This does not make economic sense.

Also see: Are Modi Govt’s GDP Figures Boosted by False Data?

But this seems to make a great deal of sense to the economists in the PM’s Economic Advisory Council.

In their point-by-point rebuttal of Dr Subramanian’s paper, they claimed all these anomalies pointed to major structural changes in the Indian economy rather than any overestimation of growth rates.

They explain the high GDP growth rates, along with low investment and export growth, arguing that in India investment and exports are not the drivers of economic growth any more. But it is public (government) spending and domestic consumption that is driving the economic growth.

Of course, they fail to explain why and how government spending has become such a driver, when the share of government spending in GDP has more or less stayed between 9.5 per cent and 9.8 per cent in all the years in this period. There is no upsurge in its share to indicate its increased contribution to growth.

And if domestic consumption is driving the growth as the EAC claims — then why is the production of automobiles like bikes (which is a major component of consumption for millions of Indians), electricity consumption, cement production (which is an indication for construction activities), etc. slowing down? The EAC fails to answer.

Further, the EAC’s rebuttal fails to explain the substantial disparity (sometimes in opposite directions) between the growth rates of manufacturing as indicated by the Index of Industrial Production (IIP), which is a volume index, and the growth of value added in manufacturing as per the new GDP figures.

How can we believe that India is the fastest growing economy in the world, when people are buying fewer motor bikes, rural areas are buying lesser tractors, there is slowdown in production of cement (probably because construction has slowed down), railways are carrying lesser freight (likely due to industrial slowdown), and the volume indices show that manufacturing has slowed down? This is the essence of Dr Subramanian’s argument and the EAC’s rebuttal to this is very weak and defies common sense.

Of course, Subramanian goes further and tries to estimate what he considers to be a more realistic rate of growth — through an econometric exercise.

Also see: Demystifying India's GDP Growth Rate

He looks at the data from 70 other countries, and looks at the relation between GDP growth of these countries and the growth of bank credit, imports and exports. He assumes that India too has a similar quantitative relationship between its GDP growth and growth of credit, imports and exports. On the basis of this estimated quantitative relationship, he arrives at growth rate of 4.5 per cent for India, between 2011 and 2017.

A lot of questions can be raised about Dr Subramanian’s estimate, which the EAC does. The assumption that the growth rates of India — a very large economy with 1.36 billion people, and structurally very different from most other economies — can be estimated from import & export and credit data of 70 other economies is rather simplistic, to say the least.

He would have done better, if he had thrown better light on the quality of data that is being used by the CSO (Central Statistics Office), especially the MCA (Ministry of Corporate Affairs) data, used to estimate the value added manufacturing sector, which seems to be overestimated. And because the manufacturing sector is overestimated, it results in an overestimation of GDP growth rates. Having served as the Chief Economic Adviser for Modi government for 5 years, he was best placed to understand the data and methodology of the CSO and the lacunae in it.

Nonetheless the questions he raises remain valid. The NSSO’s employment data shows unprecedented levels of unemployment, which is a sure sign that something is wrong in the economy.

Instead of acting to restore the purchasing power in the hands of the people (by actually increasing public expenditure), the government and its economists are busy holding up the fiction of a thriving economy.

Even if we believe the government’s data and assume that GDP growth is really high — then clearly there is something really wrong with the kind of growth which, instead of providing jobs, seems to be causing job losses.

In which case the government should stop obsessing over the welfare of large corporates — which have been cornering all the growth — and instead implement policies that will create incomes and jobs for rest 99 per cent of the people.