Subramanian vs Subramanian: Survey debunks critics on new GDP methodology

The Economic Survey has found no evidence of miscalculation of India’s gross domestic product (GDP) growth by the new methodology, as alleged by critics. “...this chapter finds no evidence of mis-estimation of India’s GDP growth,” said the Survey in the chapter titled “Is India’s GDP Growth Overstated? No!”

The issue assumes importance since many critics, including Arvind Subramanian, the predecessor of Chief Economic Adviser Krishnamurthy Subramanian, author of this Survey, found loopholes in the current methodology that uses value addition method and new base year of 2011-12.

Arvind had said in his research paper that a variety of evidence — within India and across countries — suggests that India’s GDP growth had been overstated by about 2.5 percentage points per year in the post-2011 period.

There have been similar criticisms of the methodology by other experts as well.

The Survey, penned by Krishnamurthy, however, said the models that incorrectly overestimate GDP growth by over 2.77 per cent for India post-2011 also mis-estimate GDP growth over the same period for 51 other countries by anywhere between 4 per cent and minus 4.6 per cent. These mis-estimates include wrong calculation of the UK’s GDP by 1.6 per cent, Germany by 1 per cent, Singapore by minus 2.3 per cent, South Africa by minus 1.2 per cent and Belgium by minus 1.3 per cent.

In the paper published at Harvard University, Arvind noted that the one sector where mis-measurement is particularly high was manufacturing. He said pre-2011, manufacturing value added in national accounts tended to be tightly correlated with the manufacturing component of the index of industrial production and manufacturing exports. But, thereafter, a key methodological change affected the measurement of the formal manufacturing sector, he said.

The former CEA also related the new GDP methodology with exports, imports, real credit to industry, petroleum consumption, railway freight traffic, and electricity consumption etc. The Survey said these parameters are notoriously non-stationary: not only do they flip signs frequently over various 3-year or 5-year time periods from 1980 to 2015, their values change significantly over this time period as well.