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Michigan University Economist Counters Ex-CEA's Analysis of 'Overestimated GDP' with Social Sector Indicators

The author has analysed investments in three social sectors — malnourishment rate, percentage of population with drinking water and percentage of population with access to electricity for his research.

Aditya Sharma | News18.com@aditya_shz

Updated:September 30, 2019, 6:11 PM IST
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Michigan University Economist Counters Ex-CEA's Analysis of 'Overestimated GDP' with Social Sector Indicators
Representative image.

New Delhi: India’s Gross Domestic Product (GDP) estimation since 2012 has remained high and is not over-stated, despite weak export or import, due to investments in the social sector, economist Amiyatosh Purnanandam of the University of Michigan has argued in a research paper.

Taking a methodological departure, the author has analysed “three proxies of social development” — malnourishment rate, percentage of population with drinking water and percentage of population with access to electricity to measure outcomes of those “aspects of economy that is not captured in exports, imports and credits”. “All these indicators are likely to be positively correlated with unobserved variation in GDP across country and time,” the paper said.

Over the years, India’s GDP calculation has become a matter of national politics, social aspiration and middle class inspiration. For, it is contingent on math, method and methodology – factors of the development discourse that change along political regimes in a country.

In 2019, the figure of 5 per cent GDP growth rate has found itself in the middle of an academic debate. Purnanandam’s paper, publically endorsed by current Chief Economic Advisor KV Subramanium, is a response to former CEA Arvind Subramanium’s working paper which argued that India’s GDP has been overstated by 2.5 per cent per year since 2012.

Estimating ‘Mis-estimation’

The former CEA’s June 2019 working paper titled ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications’ for the Center for International Development, Harvard University, said “methodology changes introduced for the post-2011 GDP estimates led to an over-estimation of GDP growth”.

“That is, instead of the reported average growth of 6.9 per cent between 2011 and 2016, actual growth was more likely to have been between 3.5 and 5.5 per cent. Cumulatively, over five years, the level of GDP might have been overstated by about 9-21 per cent,” Subramanium had said.

This conclusion was based on new evidence by Subramanium — compiling 17 key indicators correlated to GDP growth (like electricity consumption, two-wheeler sales, commercial vehicle sales etc.), India’s growth vis-à-vis a sample of 71 high and middle income (or control) countries was found to have risen abnormally post-2012.

This implied that GDP growth is much greater than what would be predicted by the cross-country relationship, he said. Three possible causes related to methodology were identified in the paper for the over-estimation. However, the mis-measurement is particularly severe in the formal manufacturing sector.

Post 2011, to calculate GDP, there was a “move from establishment-based data from the Annual Survey of Industries (ASI) and Index of Industrial Production (IIP) to financial accounts-based data compiled by the Ministry of Corporate Affairs (MCA)”.

Subramanium reasoned that this caused the policy on automobile to be “navigated with a faulty, possibly broken, speedometer” because of higher interest rates and “overly tight” monetary and fiscal policies over the past years.

Investing in Social Sectors

In his counter-argument, Purnanandam critiqued Subramaniums’s assumption that “conditional on macroeconomic indicators such as exports and imports growth, India’s growth rate should have followed the same path as the control countries”.

What the author essentially aimed to establish in the paper was the fact that the structure of Indian economic structure is unique in itself. For that, Purnanandam analysed investments in the social sector.

“Across all three measures, India has performed significantly better during the post-period: percentage of malnourished population has come down, there has been significant improvement in access to drinking water for rural population and the access to electricity has improved. All these indicators are likely to be positively correlated with unobserved variation in GDP across country and time,” he wrote in the paper.

“While preliminary, the analysis is consistent with the idea that India’s growth rate became less dependent on measures such as exports and imports in recent years as compared to other countries,” he added.

Subramanium, endorsing the logic of this model, also held that the country’s GDP growth rate is not over-estimated if “unobserved variables across countries” are taken into account.

He explained the above using a drug-testing example where two identical groups are tested. “In GDP growth rate context, India represents the treatment group and others represent the control group,” he said, adding that an “apple-to-apple” comparison vis-à-vis an “apple-to-orange” comparison avoids missing out on those “unobserved” ways — investment in social sector here — in which nations differ among each other.

While Purnanandam accounts for “unobserved” differences among countries to establish a case for India’s unique structural economy, Subramanium’s rationale provides answers for the slump in the country’s auto-sector.

In August, automobile industry sales touched the lowest level since 1997-98. Soon after, Finance Minister Nirmala Sitharaman announced several measures to rescue the sector, including lifting the ban on purchase of vehicles by government departments. She also announced an additional 15 per cent depreciation on vehicles bought till March 2020.

To generate demand for automobile construction equipment, Union Minister Nitin Gadkari had announced earlier in September that the government would award 68 projects worth Rs 5 lakh crore in the coming months.

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