Gross Domestic Problem

Lack of correlation between the official GDP growth rates and trends in other variables such as investment, foreign trade and bank credit stokes scepticism

By Author  |  Surajit Mazumdar  |  Published: 23rd Jun 2019  12:00 am

The recent publication of a working paper by the former Chief Economic Adviser, Arvind Subramanian, has added fresh fuel to an already raging controversy on the accuracy of India’s GDP growth figures. This debate has been going on ever since the new series of Gross Domestic Product (GDP) with 2011-12 as base year was first issued in 2015 (though the work on it began long before).

The debate has not been confined to economists and statisticians and has had both political and methodological dimensions. In this instance, it might be more difficult to separate these two strands of the controversy than on other occasions. Whether true or not, the professional views and conclusions of those who might claim to be specialists in the field have also been termed as being guided by pro or anti-government political considerations – and even Arvind Subramanian will not escape this fate despite having a foot in both ‘camps’.

GDP: What it is and what it isn’t
The two related variables at the centre of the debate are GDP and its rate of growth. GDP is a measure of the aggregate economic activity in a period of time (a quarter or a year). Simply put, it measures the value of all that is produced in the economy in a given period or alternatively the value of the expenditure on that production — since what is produced is also either sold/purchased or ends up as additions to the stocks of the producers, both ways essentially measure the same aggregate.

Nowadays, it is that expenditure measure, which is referred to as GDP, while the production measure is called GVA or Gross Value Added (taxes and subsidies accounting for the difference between them). The ‘real’ rate of growth of either of these aggregates is simply the percentage increase in them from one year to the next, after discounting any notional change caused by changes in the price level (inflation).

GDP and its rate of growth become relevant to determining the health of any economy because production is what creates the ‘income’ that sustains people — all such incomes being derived from the value added in one or the other production activity. However, GDP even when accurately measured only tells us the size of the cake and not how it is distributed and how many find gainful employment in producing it. As such, the GDP of a country and its rate of growth are by no means all that are relevant to assessing the economic conditions of its people. As far as India is concerned, falling work participation (proportion of working age population that is employed) and rising inequality have been the accompaniments of Indian growth for the last few decades.

Further, it is impossible to directly collect data year after year, quarter after quarter, from millions of individuals and units in the economy engaged in economic activity, more so in an economy like India’s where several of these units are ‘unorganised’ – who do not maintain accounts or do not submit them to any official authority. Sample surveys conducted from time to time combined with some data available on a more regular basis are then used in combination to estimate GVA or GDP, which are then revised over time as more data becomes available. In arriving at ‘real’ figures, additional difficulties are faced as proper price indices are difficult to make or are not available for several services — some (like say trade or government services) don’t even have any clearly identifiable price.

What the Debate is About
The methods used to arrive at GDP estimates can always be subject to evaluation and criticism – in the past too this has happened and even those using those methods have acknowledged some of their limitations. Methods can also improve through such criticism and debate.

In the case of the new GDP series, at the centre of the controversy in fact is what was supposed to be a methodological improvement bringing Indian practice in line with international standards. This was a shift in the way the production ‘unit’ was conceptualised — from the establishment to the enterprise-based. To put it simply, it effectively meant replacing the individual factory as the unit by the company or firm which owned that factory. A corollary of this was that company accounts from regular filings by all companies with the Ministry of Corporate Affairs (MCA 21 database) could be used.

Unfortunately, the shift to using company data is not without some loss of information too as a company can be engaged in several activities at the same time, which fall in different sectors and include non-production activities, and these parts of a company’s working are not clearly separated in submitted accounts. This results in difficulties in clearly categorising the ‘value added’ in companies among the different sectors and is of great significance because the prices of different products don’t move in tandem. As it happens, the shift to the enterprise as the unit increased the share of manufacturing in GDP at a time when manufacturing prices have tended to grow more slowly than prices in general.

The first noticeable impact of the changed methodology was that the new GDP series showed higher growth rates for the years after 2011-12 for which the data from the older series with 2004-05 as the base year were also available. Discontinuation of the older series meant that such a comparison of growth rates from the two series was not possible thereafter.

However, another comparison that showed a significant divergence – that between the manufacturing growth as measured by GDP and that derived from the Index of Industrial Production (IIP) – can be done right up to 2018-19 making use of a similarly new IIP series issued after the launch of the new GDP series and with the same 2011-12 base year. While the IIP series shows a persistent picture of industrial stagnation for nearly a decade, the GDP series shows significant year to year fluctuations with a much higher average rate. Such differences between the two measures are not impossible given that one measures value added and the other volume of production, but the persistence of this difference for so long a time is certainly highly unlikely.

What has served as additional justification for skepticism about the official GDP growth rates has been that the correlations between that growth and the trends in other variables – investment, foreign trade, bank credit, etc – that economic reasoning and empirical experience suggest should normally be expected, are simply not there to be found and all these other variables are indicating a more sluggish economy. The failure of the GDP growth rates also reflects at least short-term disruptive effects on economic activity of demonetisation and the introduction of the GST has only added to the doubts of the skeptics.

In the case of demonetisation, whose adverse effect on the unorganised sector of the economy was far greater, there was an obvious shortcoming in the method of measuring GDP to address, for which no measure was taken. This was the fact that any exceptional effect on that sector of demonetisation could not have been captured by the sample surveys conducted several years ago which formed the basis for projecting forward and estimating the unorganised sector GDP for subsequent years. The only recently released Primary Labour Force Survey 2017-18 results indicate that this impact may have been severe, but the fact that its release was withheld for so many months further added to the suspicion of undue political interference in the work of statistical agencies.

What is at Stake
For reasons outlined above, to many economists the GDP growth rate emerging from the new series just hasn’t felt right, is out of sync with everything else, and the methodological changes offered a plausible explanation. Now, someone who was occupying a key position in the government has indicated that his professional opinion was also the same. The refusal to consider that there might be some issues with the methodology and the reluctance to share the basis data from which the estimates are derived have only served to suggest that considerations of how it would make the performance of the government look are influencing decision-making about data generation, though no definitive claim can be made that the data is being rigged. The Niti Aayog stepping in to create an alternative back series of GDP based on the new method, to the one prepared earlier by another official committee, was also in line with this.

The absence of correct data reflecting the real state of the economy, or lack of credibility of available data, cannot but have adverse effects on that real state. It affects the quality of policies to address economic problems, adds to the uncertainty of economic agents within India and abroad whose decisions shape the course of the economy, and precludes the possibility of solid research underlying either sets of decisions. In other words, attempts to create a difference between perception and the reality can actually make the reality worse than it might otherwise be.

 

What is GDP

• GDP is a measure of the aggregate economic activity in a period of time — a quarter or a year

• It measures the value of all that is produced in the economy in a given period or alternatively the value of the expenditure on that production — since what is produced is also either sold/purchased or ends up as additions to the stocks of the producers, both ways essentially measure the same aggregate

• The expenditure measure is referred to as GDP while the production measure is called GVA or Gross Value Added (taxes and subsidies accounting for the difference between them)

• The ‘real’ rate of growth of either of these aggregates is simply the percentage increase in them from one year to the next, after discounting any notional change caused by changes in the price level (inflation)

• GDP and its rate of growth become relevant to determining the health of any economy because production is what creates the ‘income’ that sustains people
Contours of Controversy

• The two related variables at the centre of the debate are GDP and its rate of growth

• At the centre of the controversy is what was supposed to be a methodological improvement bringing Indian practice in line with international standards

• This was a shift in the way the production ‘unit’ was conceptualised — from the establishment to the enterprise-based

• This effectively meant replacing the individual factory as the unit by the company or firm, which owned that factory

• The first noticeable impact of the changed methodology was that the new GDP series showed higher growth rates for the years after 2011-12 for which the data from the older series with 2004-05 as the base year was also available

• While the IIP series shows a persistent picture of industrial stagnation for nearly a decade, the GDP series shows significant year-to-year fluctuations with a much higher average rate

• Failure of the GDP growth rates to reflect at least short-term disruptive effects on economic activity of demonetisation and the introduction of the GST has added to the doubts of the sceptics

• The recently released Primary Labour Force Survey 2017-18 results were withheld for so many months further adding to the suspicion of undue political interference in the work of statistical agencies

Contours of Controversy 

• The two related variables at the centre of the debate are GDP and its rate of growth

• At the centre of the controversy is what was supposed to be a methodological improvement bringing Indian practice in line with international standards

• This was a shift in the way the production ‘unit’ was conceptualised — from the establishment to the enterprise-based

• This effectively meant replacing the individual factory as the unit by the company or firm, which owned that factory

• The first noticeable impact of the changed methodology was that the new GDP series showed higher growth rates for the years after 2011-12 for which the data from the older series with 2004-05 as the base year was also available

• While the IIP series shows a persistent picture of industrial stagnation for nearly a decade, the GDP series shows significant year-to-year fluctuations with a much higher average rate

• Failure of the GDP growth rates to reflect at least short-term disruptive effects on economic activity of demonetisation and the introduction of the GST has added to the doubts of the sceptics

• The recently released Primary Labour Force Survey 2017-18 results were withheld for so many months further adding to the suspicion of undue political interference in the work of statistical agencies

(The author is Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University, Delhi)