Indian states and their propensity to exaggerate their GSDP numbers

About a decade or more after it became obvious that gross domestic product calculations by many states are not even estimates, but aspirations, the practice shows no signs of easing off. Statistical authorities have got so reconciled to the divergence that the Central Statistics Office (CSO) produces an internal document, “comparable state domestic product” for use by key government agencies. 

In pandemic-hit FY21, when the CSO calculated the economy had shrunk by 1.4 per cent at current prices, the sum of the gross state domestic products as the states calculated showed a vibrant growth rate of over 6 per cent, year on year.

For the current year, FY22, states shall once repeat the feat. In another week, the revised estimates of GSDP for all states will be available on their websites, but already the total has reached close to the annual GDP data. (see table)

When states grow faster than the nation: 

It would seem that each of the states are, thus, growing much faster than the national estimates. States project their GDP data first, as projections along with their budget, for the upcoming financial year. A year later, the data is presented as revised estimates, and another year later, are finally taken as actuals after the state accounts are trued up, by the office of the Comptroller and Auditor General.

“Even the revised estimates are not the ones on which any financial agency takes a position,” said Aditi Nayar, chief economist at ratings agency, Icra. She is correct. The 15th Finance Commission headed by N K Singh, has used only the actuals as the basis to allocate their money between the Centre and the states and among the states.

The delay has become so hard wired in the estimates of the financial sector, that it now ncauses no surprise. In the annual State Finances—A study of state budgets, which RBI brings out every year, it notes: "Wherever GSDP data are not available or not consistent with CSO’s data, the data are estimated based on the previous three years’ annual average growth rate or the growth rate projected by States.”

“The problem for the states happens as the UN System of National Accounts does not sit well with sub national entities”, said a former government statistical expert. Similarly, data from the companies are extracted by using the MCA database, the expert said. “It is frightfully difficult to extrapolate those to state level databases”, he added.

Why do the states make this effort if hardly a few believe those numbers? The higher estimate of the GSDP for a state allows the concerned finance minister to project a higher level of expenditure, particularly when revenues are flat. A detailed state by state analysis done by India Ratings and Research shows curious results. 

West Bengal, for instance, could have budgeted for a better revenue deficit of 1.4 percent of the gross state domestic products, lower than the budgeted 1.65 percent, for FY23. It did not do despite the obvious advantages from the exercise. 

The same analysis shows, West Bengal collected lower receipts in FY22 than it had budgeted for. In addition, there was a corresponding decrease in expenditure, which was much higher than the decrease in receipts. While the total receipts in FY22 were lower by Rs 10,618 crore, the total expenditure was lower by Rs 18,230 crore. 

Is there a case for the states to exaggerate their performance. Going by the numbers put out for FY21, it would seem so. In recent years, the attraction is the higher purse for capital expenditure support, from the centre. For FY23, union finance minister Nirmala Sitharaman has promised Rs one trillion of additional support to push capex. 

Almost all the major states have, therefore, pencilled in a major boost in capital expenditure. Gujarat, despite being a fiscally conservative state, has projected a lower revised estimate of capex of Rs 30,235 crore in FY22. In the process it has been able to show an almost 24 percent rise in projected capex for FY23 at Rs 37,369 crore. “Historically, on an average, the capex growth in the state was 2.9 percent during FY15-FY20. The annual capex growth for FY23 appears to be steep on an already higher base. Ind-Ra therefore believes the budget estimate for capex is stretched and unattainable in FY23.” 

Financial inventive: 

“In the tunnel of data exchange, at some stage the CSO and the states do meet at some point, but with a massive lag. The states wait till they get data from all the districts, before they reconcile their numbers. It often means a lag of over two years”, said former chief statistician, Pravin Srivastava.

The dissonance is often more acute at the municipal and at panchayats. These bodies often put out income data that is not reconciled for decades. The Comptroller and Auditor General has recently discovered that the accounts of Noida Authority have not been audited since it was formed in 1976.

The comparable state domestic product table produced by the CSO makes up for the deficit by harmonising the base for reportage. Say, there are 50 manufacturing units shown in the CSO records for a particular sector from where the data is obtained for inclusion in the GDP. For arriving at the state level data too, the same units are included by the CSO. A state statistics office will meanwhile wait to scoop up data from all possible units.

The CSO’s set of numbers are not made public. It is, however, made use of by the union finance ministry, the finance commission and by the Niti Aayog. “It is the same principle as that deployed by RBI” said an expert in state finances. While the growth rates for the preceding three financial years are used to smoothen out the possible fluctuations, the internal estimate by the CSO gives the centre room to make a consistency check.

There is essentially a bargain that happens between the centre and the states, said another expert. It is about making investments in the data collection machinery by the state governments. They must see a financial opportunity if they make those investments”, adds Srivastava.

But there is room for optimism. This is because almost the entire government accounts at the state level, are now on visible technological platforms. The tax machinery for GST is also coming up to scale. Beyond the record of government functions as farmers move to electronic platforms, a large swathe of data from the agriculture sector too, is also becoming visible.

Even without scaling up the quality of statisticians in the machinery, these improvements should make for more reliable data, in future. 

Table: India GDP estimates

Year	Combined GSDP	Mospi estimate	No of states/UTs reporting
FY22	230,858,787	23,643,875	26 states & UT*
FY21	21,052,474	19,800,914	All
FY20	21,052,474	19,800,914	All

Notes:
* Omissions: Delhi, Chandigarh, J&K, Mizoram, Manipur, Arunachal Pradesh

GDP at current prices in Rs crore

Source: Mospi and state budget data