Former Chief Economic Adviser Arvind Subramanian has defended his analysis that India’s Gross Domestic Product Growth was overestimated by 2.5 percentage points between 2011 and 2017.
The original paper drew a lot of criticism from the Economic Advisory Council to the prime minister for its methodology and assertions. In the new paper, titled Validating India’s GDP Growth Estimates, Subramanian said he had expressed doubts about the growth numbers in the 2015 Economic Survey and mid-year economic analysis.
“Growth in real credit to industry collapsed, falling from 16% to minus 1%, mirrored in the official figures for real investment growth, which declined from 13% to 3%,” he wrote. “Real exports fell from 15% to 3%; overall real credit slowed from 13% to 3%; and real imports slowed from 17% to minus 1%.”
He pointed out that the Indian economy had suffered a series of negative shocks between 2011 and 2016, three of which affected growth for the entire period. These shocks, he wrote, were export collapse, twin balance sheet problem, loss of macro-stability during United Progressive Alliance government’s second tenure, drought from 2014 to 2015, and demonetisation.
However, the new GDP series adopted in 2015 suggested that “despite all these large shocks, economic growth declined by very little, slipping from 7.7% to 6.9%”, Subramanian said. “This situation invites a question: is it really possible that these five large adverse shocks had such little impact on GDP growth?” The Gross Domestic Product growth rate between 2011-’12 and 2016-’17 should have been about 4.5% instead of the official estimate of almost 7%, the economist wrote.
“In January 2015, the CSO released new estimates using a new base year (2011-’12 versus 2004-’05), new data and new methodology,” Subramanian added. “My team and I reviewed these estimates carefully – and immediately had questions about the new numbers. We consequently investigated the matter, but still could not find convincing answers, so we began to express our doubts internally and then externally.”
Subramanian admitted that the Bharatiya Janata Party-led government did enact reforms such as the Goods and Services Tax and the new insolvency and bankruptcy law but contended that these would “deliver growth benefits in the medium term”.
The economist dismissed the government’s consumption surge argument, saying if India had suddenly developed a unique model of sustained consumption-led growth it would have reflected as high consumer confidence. However, the Reserve Bank of India’s monthly Consumer Confidence Survey paints a different picture, he added.
Subramanian also asked how India could right now grow at the same rate it did before 1980, when the economic condition was much worse. “To begin with, today’s 4.5% translates into a per capita growth rate of about 3%,” he said. “In the pre-1980s era, the GDP growth rate was about 3-3.5% and the population growth rate was 2%, yielding a per capita growth rate of 1-1.5%. So, today’s 4.5% represents more than a doubling of the old ‘Hindu’ per capita growth rate.”
He said the 4.5% growth rate was impressive because at present the economy is five times bigger than what it was in the 1980s. “Most impressively, a 4.5% growth rate is a notable achievement in the current, post-global financial crisis world,” he added.