 |
| Sujit Kumar Senior Economist |
Dr Arvind Subramanian, former Chief Economic Advisor, Ministry of Finance, Govt of India, has cast doubts on India's gross domestic product (GDP) data, arguing it is overestimating growth up to 2.5 percentage points since 2012. His article relies on 17 indicators tracking activity across sectors. Through econometric analysis of the indicator trends, he estimates likely trajectory of sectoral gross value added (GVA) from 2012 onwards. His conclusion mostly rests on marked differences between volume based indicator such as index of industrial production and manufacturing value added as reported in GDP estimates.
Three issues are pertinent here. One, whether two periods GDP estimates, viz. 2004-11 and 2012-18, are comparable? The answer is no. There's definite change in methodology as far as value add estimates are concerned. Sectoral composition has changed, which doesn't corresponds well with data of Index of Industrial Production. The entire confusion is because of two factors - Manufacturing and Trade. The 2011-12 series counts part of Trade in Manufacturing as this is largely indistinguishable if a small firm manufactures and markets all by self. Since it is difficult to isolate their respective value-added, it is better to keep it with manufacturing. As far as weak correlation of volume based indicators with value based estimates is concerned, a lot has to do with technology. For example, capturing surplus created due to better platforms and data is desirable, but not likely through volume based indicator. Say, in transport sector, car aggregators like Ola and Uber may have helped increased conveyance in terms of passenger ride, but it will not necessarily correspond with number of passenger vehicle sales. Likewise, MakeMyTrip and Oyo may have helped better organization of hotel accommodation. This, however, will not necessarily correspond with new rooms added in hospitality industry.
Two, Can 7% GDP growth be achievable with Investment rate of 30%. It's possible only if investment is more productive. Technology advancement is likely solution to bring Capital-Output ratio down. Think of a firm having to maintain equipment like telephone, fax machine, scanner, calculator, alarm clock, calendar, diary, camera, audio/video player and a desktop computer doing basic stuff to maintain everyday affairs of office. All these activities can now be performed with a single gadget, mobile phone/tablet. Costs taken together are a fraction of earlier arrangement. The firm accomplishes all that it needs with lesser resources, thereby creating more value add (Output-Input). The statisticians therefore update their methodology as well as coverage of data to better align with changing times.
Three, whether shell companies can distort GDP estimates, as recent data tells a significant percentage of companies in MCA database are found non-operational. The answer is not much. At best, it is likely to change the sectoral composition of GDP, but should not impact at aggregated level. Shell companies are, after all, created to divert reporting of value created in parent company to others, so that tax implications are lower. Even if shell company doesn't create any value, it doesn't destroy value added by parent company.
To sum up, claims about India's GDP being overstated by Government statistician is nothing new. However, it is anguishing how persistent the doubters have been and repeated clarification of Government has not persuaded to change that opinion. The meat of argument of skeptics pertain to real GDP estimates, which is derived by deflating the nominal GDP data through appropriate deflators (the price indexes). The price estimates themselves have got revised post 2011 with evolution of Pan India Consumer Price Index. It is good that Arvind Subramanian has reopened the debate on GDP estimation. Hopefully, it will lead to better research and peer validation, which in turn, earn broader acceptance among public.
Comments
Post a Comment