India grew only at 4.5% from FY12- FY17: Former CEA

In a shocking revelation, country's former chief economic advisor Arvind Subramanian has said India's average annual economic growth in the five-year period between 2011-12 and 2016-17 may have been just 4.5% and not 7% as pegged by official estimates.

He has also suggested that going forward, there must be reform urgency stemming from the new knowledge that growth has been tepid.

Deccan Herald was the first newspaper to raise the question whether the economy was indeed growing at 7-8% as claimed by the government. We pointed out in our Sunday Spotlight on February 17, 2019, that all the data on economic activity showed that it was not. Now, former Chief Economic Adviser Arvind Subramanian has confirmed what we suspected all along.

Subramanian, who quit the NDA government midway his tenure last year, has said that methodological changes led to GDP growth being overstated by about 2.5 percentage points in the five-year-period that spans both UPA and NDA governments.

“Official estimates place average annual growth for this period at about 7%. Actual growth may have been about 4.5 per cent, with a 95 per cent confidence interval of 3.5 to 5.5%,” Subramanian said in a write up in 'Indian Express'.

Subramanian in his new research paper released Tuesday morning drew attention to the manufacturing sector, where he said the mis-measurement seemed particularly severe. He also argued that inaccurate statistics on the economy’s health dampen the impetus for reform.

“For example, had it been known that India’s GDP growth was actually 4.5%, the urgency to act on the banking system or on agricultural challenges may have been greater,” he said.

Before 2011, formal manufacturing value added from the national income accounts moved closely with IIP (Mfg.) and with manufacturing exports. But afterward the correlations turn strongly and bizarrely negative.

His research has used 17 key indicators that are “typically” correlated with GDP growth for an 18-year period between 2001 and 2018 that included electricity consumption, two-wheeler sales, commercial vehicle sales, tractor sales, airline passenger traffic, foreign tourist arrivals, railway freight traffic, index of industrial production, petroleum, cement, steel and overall real credit among others.

He said while 16 out of 17 indicators were positively correlated with India’s GDP growth before 2011, it changed after that year. Post 2011, 11 out of 17 indicators were “negatively correlated” with GDP.

“The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer,” he said, blaming both monetary and fiscal policies, which appeared too tight.

“In reality, weak job growth and acute financial sector stress may have simply stemmed from modest GDP growth. not torrid; And from recognising that growth of 4.5% will make the government’s laudable inclusion agenda difficult to sustain fiscally,” Subramanian said.

Subramanian has rued that throughout his tenure, his team and he grappled with conflicting economic data and raised doubts frequently.

“We raised these doubts frequently within government, and publicly articulated these in a measured manner in government documents, especially the Economic Survey of July 2017,” he wrote.