India is ranked among the world’s most prosperous economies with annual GDP growth rate of 7% plus. But truth now looks murky as analysts accuse India of faking its growth numbers.
In the BJP-led government’s era, India was seen globally as one of the fastest-growing major economies of the world, even attaining growth rate at par with first world nations like UK and Germany.
India’s former chief economic adviser Arvind Subramanian estimates annual growth near about 4.5% a year between 2011-12 and 2016-17.
But recent speculations and unofficial calculations by economists have given rise to speculation that the numbers proclaimed by India may be overplayed. In an academic paper, India’s former chief economic adviser Arvind Subramanian has estimated annual growth numbers nearabout 4.5% a year between 2011-12 and 2016-17.
Evidence 1. Growth correlations between 17 simple, macro-ish, & “independently produced” indicators and GDP break down post-2011. Pre-2011, 16 positively correlated with GDP; post-2011, 11 negatively correlated. 4/n pic.twitter.com/PRHmYlZId2— Arvind Subramanian (@arvindsubraman) June 10, 2019
This varies in stark contrast to the numbers projected by the Statistical Institute of India. As per Subramanian, recent changes in the approach to calculate gross domestic product are at the centre of the allegedly ‘faked’ numbers.
Why caused the inflated numbers?
Subramanian, who served as chief economic advisor to PM Modi from October 2014 till June 2018 is at the heart of the recent debate. And what makes it a serious discussion is his position and credibility on the subject.
As per Subramanian’s calculation, the actual growth stands almost 2 percentage points lower on average from the official data.
Subramanian argued in his recently published research paper at Harvard, that the reason for the inflation in GDP numbers is due to the change in how India calculates its manufacturing output. In his paper, he based his opinion on alternative data like auto sales and electricity consumption. As per his calculation, the actual growth stands almost 2 percentage points lower on average from the official data.
The statistics ministry rejected Subramanian’s claims. Chief statistician Pravin Srivastava stated that the government agency follows international standards in its growth computation. A number of other independent economists have refuted Subramanian research methodology.
Chief statistician Pravin Srivastava stated that the government agency follows international standards in its growth computation.
The former chief economic advisor however defended his work. Subramanian noted that he had raised red flag about the methodology of the statistics minister back in January 2015 when he was in office.
Furthermore, he opined that it was unlikely for India to achieve such strong growth numbers against the external and internal economic pressure. The 2016 demonetization which resulted in cash crunch in the market is another factor as per Subramanian that couldn’t have possibly let GDP grow so robustly.
India’s statistical data has infamously come under global scanner for alleged political interference, much like neighbour China. The scepticism has been ongoing since 2015 when India revised GDP data to reflect the new methodology.
The controversy has been ongoing since 2015 when India revised GDP data to reflect the new methodology.
And its not just the GDP numbers. Ahead of the General Elections in May which reinstated Narendra Modi as PM, leaked official report of unemployment rate at a 45-year high placed the government in an awkward light.
The leak fuelled allegations of deliberate hiding of data to check voter sentiment ahead of the polls. The embarrassment was further aggravated when over 100 economists from India and abroad wrote a petition to the Prime Minister, voicing concerns of possible political interference in the official statistics.
Indian government only invests just 0.2% of its annual budget on economic statistics.
Indian government only invests just 0.2% of its annual budget on economic statistics. Many top officials have resigned prematurely in recent years in frustration over political interference in statistical work.
Growing global mistrust
A number of analysts opine that from an investment point of view, the damage might already have been done. As per Hugo Erken who is a senior economist at Rabobank International, Netherlands, “Foreign investors are concerned about India’s GDP data becoming politicized. From the international perspective, the thinking is that where there is smoke, there must be fire.”
Evidence 3. In cross-country regressions, India has normal relationship b/w growth in standard indicators and GDP pre-2011, but post-2011 it is an outlier (growth much greater than predicted by relationship). This finding–normal pre-2011, but outlier post-2011–is robust. 6/n pic.twitter.com/XhhS7iPM4U— Arvind Subramanian (@arvindsubraman) June 10, 2019
The controversy has spouted apprehension among global markets, which is worrying to the government’s target of a $5 trillion economy. Steve Hanke, a professor of applied economics at Johns Hopkins University says, “People have raised issues about the dodginess of the Indian numbers, and that is a real problem. Once you lose confidence in the statistical services, it creates a lot of uncertainty in the markets. From the investor point of view, it raises a red flag.”
Banks such as Nomura Holdings and Goldman Sachs Group have gone on to develop their own models to get a better idea of the India’s growth.
Economists and analysts are relying on proxy indicators like auto sales; credit growth, corporate profits and investments; and freight and transportation for services industry growth. The controversy has resulted in global giants not trusting India’s official statistics. Banks such as Nomura Holdings and Goldman Sachs Group have gone on to develop their own models to get a better idea of the India’s growth.
Government needs to act quickly
India’s numbers are secretive by global standards. Official reports do not observe key global metrics like retail sales and housing stats. Sonal Varma, Chief India economist at Nomura explains, “There are so many aspects of the economy that are not covered. Given the speed at which India is growing, it is very important to be able to measure better.”
As per Subramanian, there is no option for India but to repair the damage to its reputation in global economic circles and markets. The only way, he states, is changing the methodology of GDP calculation and instating an independent watchdog to ensure credibility of figures.
As per ex-CEA Arvind Subramanian, there is no option for India but to repair the damage to its reputation in global economic circles and markets.
And the government can hardly waste time. The new finance minister is on an ambitious project to raise money through the country’s India’s first sovereign bond offering which she expects will raise as much as $10 billion. But such an offering to attract interest will demand a transparent economy with credible official statistics.
By: Chitresh Sehgal, Senior Editor, Dkoding Media