New Delhi: Sometime in March 2017, a few months after the demonetisation shocker, Prime Minister Narendra Modi had made his famous “hard work versus Harvard” speech while campaigning for the Uttar Pradesh assembly elections. He was referring to the latest GDP data that miraculously showed growth had actually accelerated instead of slowing down due to demonetisation, which was announced on November 8, 2016, despite more than 80 per cent of the currency in circulation being sucked out of the system.
“On the one hand are those [critics of note ban] who talk of what people at Harvard say, and on the other is a poor man’s son, who through his hard work, is trying to improve the economy,” he said at an election meeting in Maharajganj. “In fact, hard work is much more powerful than Harvard,” he said.
Modi was responding to criticism of demonetisation by Nobel laureate Amartya Sen and no one could contest the PM’s logic at that time: after all, if GDP figures showed a spurt in growth, what argument could counter the numbers? Vague unease about data collection methods, suspicions of fudging were rightly ignored.
But now, in an ironic twist, former Chief Economic Adviser Arvind Subramanian has said in a working paper at Harvard that India’s GDP grew at just 4.5% between 2011-12 and 2016-17, not at around 7%, as claimed by successive governments. Though Subramanian’s findings need to be further correlated by experts, it is important to understand here that he has questioned GDP growth under both UPA II and NDA I governments. So the Congress’ gloating over Subramanian’s latest revelations seem over-the-top.
The Congress tweeted on Wednesday: “Former Chief Economic Advisor, Arvind Subramanian, finds that the govt's new formula to calculate GDP is completely baseless. In the first few years of BJP rule the GDP was closer to 4.5% rather than 7% as the govt. has been claiming”.
Also, Subramanian’s questions about growth do not exclude the time period when he was India’s CEA. In fact, in the annual Economic Survey report for 2014-15 authored by him, Subramanian had raised questions over the new GDP series (with base year 2011-12 instead of 2004-05) and subsequently too, he peppered his Economic Surveys with queries over the data.
Now, in the latest working paper, Subramanian has said that India changed its data sources and methodology for estimating real gross domestic product (GDP) for the period since 2011-12. This change has led to a “significant overestimation” of growth. Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7%. “We estimate that actual growth may have been about 4½ percent with a 95 percent confidence interval of 3 ½ -5 ½ percent.”
Second, the evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust. Lending further credence to the evidence, part of the overestimation can be related to a key methodological change, which affected the measurement of the formal manufacturing sector.
Third, these findings alter our understanding of India’s growth performance after the Global Financial Crisis, “from spectacular to solid”.
Though in the final reading, Subramanian has stopped short of further embarrassing both governments by calling India’s performance “solid”, he does end up bolstering the point made by former RBI governor Raghuram Rajan — whose tenure happened to coincide with his — who has already hinted that all is not right with India’s growth figures.
Most worryingly, the growth estimated by Subramanian calls into question India’s claim of being the fastest growing economy, ahead of China, during the six years under review. What the former CEA has said begins to make sense when, even as a lay person, one tries to correlate the GDP data with actual growth — in jobs, in manufacturing and services sectors etc.
But here is a silver lining to this dark cloud of numbers: The new data has come when India is experiencing a marked slowdown in economic activity — the government itself has acknowledged that growth fell to a five-year low in 2018-19 to 6.8% and GDP growth was lowest in 20 quarters in the last quarter of 2018-19 at 5.8%. What better time than now to revisit data collection and data analysis methods so that they become more robust?
As Subramanian rightly says in his paper, growth over-estimates matter not just for reputational reasons but are critical for internal policymaking. If his numbers hold up on further scrutiny, then it would imply that interest rates were kept too high between 2011-16 and nowhere near enough economic reforms were undertaken by successive governments. Both these pain points can be addressed now, as growth rate is faltering for the last few months. The RBI has already slashed the repo rate, its third successive cut in a row, and the government could take a cue and offer incentives for growth in the upcoming Union Budget.
Subramanian says, “If India’s GDP growth had been appropriately measured, the urgency to act on the banking system challenges or agriculture or unemployment could have been very different.” The time for undertaking big bang economic reforms is now.
The government may continue to deny any fault in GDP data, but it would be in national interest to re-examine the growth numbers. After all, the government first held back the latest Periodic Labour Force Survey (PLFS) which showed historic level of unemployment as polls were approaching and then released it, having returned to power with a historic mandate. The political capital it has earned with such a mandate should allow it to examine any data flaws, reassure investors and others about the robustness of its data collection and restore the faith in India’s growth story.
(Author is a senior journalist. Views expressed are personal)