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HomeIndiaGovernance'Spurious criticism' — PM's economic council rebuts Arvind Subramanian's GDP claim

‘Spurious criticism’ — PM’s economic council rebuts Arvind Subramanian’s GDP claim

The main contributors of the PM-EAC report are economists Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Vimani.

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New Delhi: The Prime Minister’s Economic Advisory Council (PM-EAC) has issued a 12-page report countering former chief economic adviser Arvind Subramanian’s charge that India’s GDP growth has been overestimated by 2.5 percentage points since 2011.

The report rejects the methodology, arguments and conclusions employed by Subramanian in his working paper “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications”, and claims it “would not stand the scrutiny of academic or policy research standards”.

The main contributors of the PM-EAC report are economists Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Vimani.

Change in methodology not a new phenomenon

The report, titled “GDP estimation in India – Perspectives and Facts”, argues that India has frequently changed its GDP calculation methodology.

The latest one, adopted in June 2015, was based on the recommendation of five subcommittees formed by the Advisory Committee on National Account Statistics in 2008. Among other changes, the new methodology involves a shift in the base year used for GDP calculation, from 2004-05 to 2011-12.

According to the PM-EAC report, the new approach improves upon the earlier one on two parameters.

First, the committee argues, it accounts for differences in workers’ productivity and assigns weight to different categories of workers based on their productivity.

Second, it says, the new series differs from the previous one in the relative weight of various sectors, the change being the result of availability of new data and better coverage.


Also read: RBI to the rescue – Modi govt eyes bank’s Rs 9.6 trillion surplus to beat economy blues


‘New methodology in line with global standards’

According to the PM-EAC, other countries have also changed their GDP calculation methodology on similar lines as India, which had resulted in both increases and decreases in GDP numbers.

The report highlights that OECD (Organisation of Economic Co-operation and Development) countries, on average, observed an increase of 0.7 per cent in real GDP after the change.

“Had India not changed its system, it would have been an outlier, and would no doubt have been decried by critics,” says the report.

‘Issues’ with Subramanian’s analysis

The report mentions several problems with Subramanian’s conclusions, especially his emphasis on using the changed correlation between GDP growth and indicators of economic activity.

Subramanian cited 17 indicators in his paper, and said they had a strong correlation with GDP growth under the old methodology, but not with the new one, thereby suggesting an overestimation in India’s growth calculations.

According to the PM-EAC, the correlation of indicators with GDP can change over time, even if the average annual growth rate of the indicator in question remains the same.

Citing an example, they argue that foreign tourist arrivals — one of the indicators used by Subramanian — exhibited different correlations with GDP between 2001-12 and between 2012-18, even though they grew by approximately 8 per cent in both periods.

The panel says a “weaker correlation” doesn’t necessarily imply a slower growth, adding that it can also mean the contributing variables to growth “changed significantly post global financial crisis”.

In its conclusion, the PM-EAC seeks to dismiss Subramanian’s paper as “spurious criticism”. “The weakness of Dr Subramanian’s attempt to suggest that the growth numbers are over-estimated confirms that the estimation process is robust to spurious criticism,” it says.


Also read: Modi’s suspect GDP numbers have done real damage to India’s economy


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2 COMMENTS

  1. Without comparing the erudition of the two camps, a simple question arises – Who has an incentive to speak the truth, who to dissemble ? Dr A S is not shooting for a government job or even a Padma award. He is in fact, going against – although his thesis should not be seen in these adversarial terms – a powerful incumbent whose term has just been renewed. Members of the PMEAC, no doubt economists of distinction, are official spokespersons, like an envoy posted abroad who dutifully defends his government’s position. 2. Most people will weigh the two versions of the truth on the touchstone of how well their families have been doing over the last five years, at a time when the global economy has sent tailwinds our way, starting the fall in oil and commodity prices. Consider the increasingly desperate measures adopted to raise revenue through disinvestment, now the angling for the RBI’s reserves. If we circle the wagons, double down on the past, we will continue to move further down an unsustainable path. Investors will make their own assessments. I think we should all prepare to hear a long, meandering Budget speech.

  2. More a layperson reads discussions on GDP calculations, more GDP calculations becomes a mystry. I know only this much that economic theories are not pure science. These theories work within boundaries defined by economists themselves. I also know that when the economic environment within these boundaries changes, the assumptions made by economists may become invalid. My logic is applicable to both Arvind Subramanian (AS) and PM-EAC. However, AS has erred in applying the conclusions of his research to the current GDP calculation practice. He also made mistake by declaring that his method is correct and the current method is wrong. By this AS has tried to enter politics over GDP and now he will be responded more in terms of politics rather than the validity of his research. To me it looks AS has been misled by his team of researchers. He should have known that the political claims have no validity across political spectrum as science theories are suppoed to do.

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