New Delhi: After the Prime Minister’s Economic Advisory Council, the 2019-20 Economic Survey has defended India’s growth numbers and dismissed arguments raised by former chief economic adviser Arvind Subramanian that India’s GDP numbers are overestimated.
The survey, authored by a team led by Arvind Subramanian’s successor Krishnamurthy Subramanian, dedicates an entire chapter to assuaging investor concerns, at a time when India’s economic growth is expected to slow down to an 11-year low of 5 per cent.
“As investors deciding to invest in an economy care for the country’s GDP growth, uncertainty about its magnitude can affect investment. Therefore, the recent debate about India’s GDP growth rates following the revision in India’s GDP estimation methodology in 2011 assumes significance, especially given the recent slowdown in the growth rate,” the survey states.
“Using careful statistical and econometric analysis that does justice to the importance of this issue, this chapter finds no evidence of mis-estimation of India’s GDP growth.”
What Arvind Subramanian had argued
In a working paper last June, Arvind Subramanian had argued that India’s GDP was overestimated by 2.5 percentage points, and that India’s economy may have grown at an average of 4.5 per cent in the period between 2011-12 and 2016-17, as against the official figures of 6.9 per cent.
Arvind Subramanian, the CEA (October 2014-June 2018) for most of the Modi government’s first term in power, used a series of high-frequency indicators to make his claim that GDP and these indicators were moving in divergence.
He had pointed out that data from indicators like electricity consumption, railway freight traffic, index of industrial production, sales of two-wheelers, commercial vehicles and tractors, airline passenger traffic, foreign tourist arrivals, petroleum consumption, cement, steel, overall real credit, real credit to industry, and exports and imports of goods and services did not justify the GDP numbers.
His findings had raised questions about the credibility of India’s macroeconomic data and had forced the Prime Minister’s Economic Advisory Council to rebut the claim through a detailed paper, wherein the advisers questioned the way Arvind Subramanian had arrived at his findings.
Economic Survey methodology
The Economic Survey uses new firm district-level data and other indicators like nutrition and electricity to dismiss the former CEA’s argument.
“First, the granular evidence shows that a 10 per cent increase in new firm creation increases district-level GDP growth by 1.8 per cent. As the pace of new firm creation in the formal sector accelerated significantly more after 2014, the resultant impact on district-level growth and thereby country-level growth must be accounted for,” the survey states.
“Along these lines, Purnanandam (2019) shows that India’s improvement in indicators such as access to nutrition and electricity might explain the higher growth rate in Indian GDP post the methodological change.”
It adds that new firm creation in the service sector is far greater than in manufacturing, infrastructure or agriculture.
The survey, however, concedes that there is a need to invest in ramping up India’s statistical infrastructure, and that the setting up of the 28-member Standing Committee on Economic Statistics (SCES), headed by Pronab Sen, India’s former chief statistician, is important.