New Delhi: India’s estimation of its gross domestic product (GDP) has once again generated debate, this time against the backdrop of the G20 summit in New Delhi.
A Princeton University professor wrote an article in an international publication accusing the Indian government of conducting a “branding and beautification” exercise on its GDP numbers to make them look better in the run-up to the G20 summit.
On the other hand, Ministry of Finance officials have argued that there has been no change in the methodology, and that the latest data was calculated the same way as always. Further, they noted that no such allegations of data impropriety were levied when India registered the largest economic contraction among the major economies due to the COVID-19 pandemic and resultant lockdown, even though the method then was the same as it was now.
The controversy began when Project Syndicate, a reputed publication, Wednesday published an article by Ashoka Mody, a visiting professor of international economic policy at Princeton University. In his article, Mody questioned the method which India used to arrive at the 7.8 percent GDP growth rate for the April-June 2023 quarter.
The core of his issue was a line in the computation titled ‘discrepancies’, which refer to the difference in measurements when using two different methods to estimate GDP — the income method and the expenditure method.
While the former takes into account the total income generated by the goods and services produced, the latter takes into account the money spent on the final goods and services produced in a country during a period of time.
India uses the income method. “Normally an innocuous reporting convention in national accounts, the discrepancy is the difference between domestic income (earned by producing goods and services) and expenditure (what residents and foreigners pay when buying those goods and services),” Mody explained in his article.
In principle, expenditure should equal income earned, because producers can earn incomes only when others buy their output, he wrote. “In practice, however, estimates of income and expenditure differ in national accounts everywhere, because they are based on imperfect data.”
Mody went on to say that the discrepancy between these two estimates don’t typically matter when it comes to growth rates, because both income and expenditure have similar trends. However, he said, there are times when the two differ, leading to “hugely consequential implications for evaluating economic performance”.
He pointed out that the National Statistical Office’s (NSO) April-June quarter report was one such case.
“It (the NSO report) shows that while income from production increased at an annual 7.8 per cent rate in April-June, expenditure rose by only 1.4 per cent,” he said. “Both measures clearly have many errors. The NSO nonetheless treats income as the right one and assumes (as implied by its ‘discrepancy’ note) that expenditure must be identical to income earned.”
This, Mody said, was an “obvious violation of international best practice”. He said that the Australian, German, and UK governments use data from both the income and expenditure sides, adding that while the US favours the expenditure side, its Bureau of Economic Analysis (BEA) uses an average of the two.
“When we apply the BEA method to Indian data, the most recent growth rate falls from the headline 7.8 per cent to 4.5 per cent — a marked decline from 13.1 per cent in April-June 2022, when the post-COVID-19 rebound first triggered the current wave of India hype,” Mody said, adding that Indian authorities “are choosing to dismiss inconvenient facts so that they can parade seemingly flattering images and headline figures ahead of the G20 summit”.
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‘Insinuation about GDP does not hold ground’
The Ministry of Finance was quick to respond to this article with one of its own, written by chief economic advisor V. Anantha Nageswaran and senior adviser Rajiv Mishra, published Friday in Mint.
One of the arguments they made was that the discrepancy talked about by Mody for the April-June 2023 quarter would be balanced out in the subsequent quarters — a normal process.
“In Q1 of 2023-24 (the April-June period under consideration by Mody), the discrepancy of 2.8 percent has a plus sign,” the two government officials said. “This indicates that the expenditure side has explained only 97.2 percent of the income side.”
This, the authors say, does not mean that the 2.8 percent that has yet to be explained does not exist.
“It exists and lends itself to being explained in subsequent quarters… Over a long period, the negatives and positives offset each other,” the authors said, adding that the insinuation that GDP is exaggerated “does not hold ground.”
Further, they argued that neither is this discrepancy a new thing, nor has the income side approach — the one used by the government — always been higher than the expenditure side.
“There has been a fair distribution of discrepancies since 2011-12 within a range of 6.4 percent to (-) 4.8 per cent,” they said. “The latest quarter discrepancy lies well within that. This is easy to verify.”
They argued that when the government’s statistical authorities reported a contraction in India’s GDP at the level of around 25 per cent in the April-June quarter of 2020-21, “there was nary a murmur on the credibility of Indian statistics because it had reported one of the severest contractions in the history of Indian GDP data”.
“That data suited naysayers, and hence it was ‘credible’,” they added.
Finally, the government officials argued that Mody’s allegation that GDP growth in the first quarter of 2023-24 was exaggerated would have been more believable had the government always chosen the higher of the two methods when it reported its growth numbers.
“Government statisticians have never done that,” the two top officers said. “They have always reported GDP growth based on the income approach, whether it exceeded or fell short of the expenditure-based estimate.”
(Edited by Uttara Ramaswamy)
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