GDP claims: PM’s advisers leave no one any wiser

In economic analysis, it is important to acknowledge that any critique of methodological frameworks — in statistical or non-statistical use — broadly relies on two foundational elements: a form and structure.

A form-based critique may often counter content of, say, a testable hypothesis or research question. Structure-based critiques seem to be mostly concerned with the selection of identified variables (say, either dependents or independents in a model), or on the nature of conclusive evidence, drawn from pre-existing theoretical models.

In the case of national income accounting or GDP measurement – a statistical process — the form and structure of analysis can often be designed by a given analyser in the way she wants. Therefore, selection of indicators used in studying GDP growth trends for a nation over a period of time can be picked to suit a given hypothesis and then validated accordingly.

Unless one looks at an underlying growth model and tries to support (or counter) it by developing an alternative explanation to the research question, any critique will hardly yield objective certainty on what the actual trends are. So, how we design and select indicators remain key to GDP diagnosis.

Reading the response of the Prime Minister’s Economic Advisory Council (PMEAC) to former chief economic adviser Arvind Subramanian’s working paper, one gets the impression that the only purpose (hypothesis) of its authors was to refute Subramanian’s research findings, without offering an alternative explanation to the changing composition (and current nature) of India’s growth trajectory.

A critique of Subramanian’s conclusions is surely acceptable from a structural point, owing to the ‘extrapolations’ he makes in asserting that GDP numbers were overestimated after the change of base year of calculation to 2011-12. The EAC authors themselves acknowledge: “GDP calculation is an imperfect art”, and that the “essence of the exercise is to pursue perfection in calculations in a manner that best reflects a country’s (economic) situation.” And it is on this latter aspect that the note fails to provide much-needed clarity.

Irrespective of whether GDP numbers are ‘overestimated’ or ‘underestimated’ (after changes in GDP calculation methodology), an issue that can remain a persistent squabble, if the underlying growth model remains the same, the real question is whether these ‘extrapolations’ — as chosen – do actually reflect India’s actual economic situation during a period of time?

One can look at doing an inter-sectional analysis or a mapping of GDP figures with other related composite (or structural) indicators reflecting an economy’s performance. National income (or output) is simply represented as ‘Y’, where ‘Y’ is seen as an accumulated function of value added in growth of: ‘C’- Consumption demand (or expenditure); ‘I’- Investment demand (or expenditure); ‘G’- Government demand (or expenditure), along with ‘NX’ - Net Exports (or trade account position).

Over the last three-to-four years (especially since early 2014), well-argued evidence shows how data on these composite aggregates — calculated from real credit growth, export growth performance, vehicle purchases, domestic private investment volumes across sectors, etc — are all seeing a substantive decline in performance. The Union government’s own fiscal expenditure position observed a ‘slippage’ (when weakening private investment levels were causing public expenditure in certain sectors — like in power sector — to rise).

So, if almost all these indicative aggregates are poorly performing from one quarter to another, how is it that the official GDP level continues to project sustained growth of above 6.5% for 2014-17? In other words, either ‘extrapolations’ made by official government-released numbers have chosen only those indicators (from a given sector) where the final growth numbers can reach above 6.5%, or there is something structurally wrong in the underlying growth model which makes the entire statistical process a mishmash between ‘GDP growth data’ and ‘actual conditions of growth’.

Subramanian’s study and methodology can (and must) definitely be questioned and perhaps his actual GDP estimates may be argued to be ‘wrong’ or ‘flawed’ (he himself acknowledges that there are issues within some of the assumptions he makes), but the same can be argued about anyone else crunching these numbers from a similar underlying model without offering a clear explanation on changes seen in the structural composition of India’s growth trajectory (say, post the base year change to 2011-12).

Still, while the debate on GDP calculation methods might continue, a more pressing issue is what does this do to the actual credibility of the government’s own statistical processes, or how open are they to independent scrutiny and test. Base years for GDP calculations have been changed previously as well to correct for more accurate depictions of growth, and independent analysts (including leading economists) trusted these numbers for most of the time up until now.

The EAC or the Union government may need to acknowledge here that it is facing a serious ‘crisis of statistical credibility’, and while Subramanian may be ‘proved wrong’, what scholars require is a ‘trustworthy’ space for knowing whether analysis offered by the government (in any form or structure) can actually be relied upon for further work.

The conditions of growth in the Indian economy seem to have only worsened in recent years, and amidst this, if the ‘basic denominator’ of all policy discussion (GDP) itself paints a disputable picture, no serious scholar or researcher will trust the evidence provided (depending thereafter on privately sourced information from companies extracting macro-economic data for profit).

An intersectional exercise of validation in composite indicators of growth and discussions around changes in underlying growth theory warrant an institutional agency and independent scrutiny that can help verify and validate periodic national income data. This will go a long way in allowing independent organisations and economists to trust official GDP figures — as and when released — and see if they best reflect existing conditions of growth. As of now, this doesn’t seem to be the case.

(The writer is Assistant Professor of Economics and Executive Director, Centre for New Economics Studies, Jindal School of International Affairs, O P Jindal Global University)