The GDP fiasco

Govt should withdraw the flawed back series of GDP data

India’s economy expanded at a disappointing pace of 7.1 per cent in the second quarter (July-September) in sharp contrast to 8.2 per cent growth in gross domestic product (GDP) in the first quarter of the current fiscal year. While it is true that the second quarter was challenging for the economy because of a sharp increase in crude oil prices, a higher import bill, and a weaker rupee, it is equally true that there was a favourable base effect since the economy struggled in Q2FY18 due to the effects of demonetisation and the disruption caused by the introduction of the goods and services tax. The only bit of encouraging news in the GDP data was gross fixed capital formation, which crossed 32 per cent of GDP (at constant prices) for the first time under the current regime. At current prices, however, it was lower at 29.2 per cent of GDP. But the road ahead for the second half of the year does not look good, as the Reserve Bank of India expects the economy to register slower growth rates in the next two quarters. The only upside under the circumstances is that the RBI might hold back on raising interest rates, given the subdued growth and the fall in oil prices in the last few weeks. With the general elections a few months away, substantive reforms of any nature appear unlikely. The government would do well to control public expenditure lest a higher fiscal deficit drags down growth further.

There is another significant decision the government should take: It should withdraw the announcement regarding the back series of the GDP data with 2011-12 as the base year. The back series provided the GDP growth data from 2004-05 to 2010-11. Ordinarily, this would be a welcome development as base-year revisions and back-series calculations provide a sense of continuity for economic analysis. However, the latest back-series data, regardless of the technical sophistication involved, seems to run contrary to all the other available evidence for the years in question. The data does not align with that from the real economy — tax revenues, credit growth, trade performance, corporate sales and profits, or indeed the level of investment in the economy. This reflects poorly on the ability of the back series to accurately reflect what happened during these 10 years. What further undermines the credibility of the back series is that the decade in question coincides with the tenure of the United Progressive Alliance.

For a country such as India, which is hoping to aggressively attract foreign investors and sustain a high-growth momentum, such a controversy is avoidable. An attempt to score political points through the numbers game has not only damaged India's achievement but also distorted history — both of which should be above politics. It should be obvious to the government that independent opinion has rejected the numbers put out, and the Central Statistics Office (CSO) has lost its reputation in the process. This damage needs to be repaired. If the government values the credibility of India’s growth data, it should promptly withdraw the back series. Further, the CSO should take on the task of recalculation independent of the NITI Aayog. To regain public trust, the methodology should be discussed in advance with known experts in the field, including people who have headed the CSO and statistical commission, etc. in the past, so that it does not invite controversy or fly in the face of other facts and numbers that are publicly available.