India Has Been Accused of Overstating Its Growth Statistics

Now it looks like that rapid pace may have been overstated. An academic paper by a former chief economic adviser to Prime Minister Narendra Modi estimates annual growth averaged closer to 4.5% a year in the fiscal years from 2011-12 through 2016-17, and says recent changes to the way gross domestic product is measured are problematic.

The data controversy, which has been widely aired in the national press, is a blow to Modi, who’s set his sights on making India a $5 trillion economy. “People have raised issues about the dodginess of the Indian numbers, and that is a real problem,” says Steve Hanke, a professor of applied economics at Johns Hopkins University and a member of the advisory council of the Society for Economic Measurement, an international body that advocates for strict data standards. “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.”

Much like China’s official data, India’s statistics frequently come in for questioning. The GDP figures have been at the center of a raging debate since 2015, when the government revised the data to reflect a change in its methodology. The jobs numbers are also mired in controversy. Foreign banks such as Nomura Holdings Inc. and Goldman Sachs Group Inc. have devised their own statistical models to give them a better sense of what’s happening.

Arvind Subramanian served as Modi’s chief economic counselor from October 2014 until June 2018, and his stature gives additional weight to the debate about India’s flawed numbers. In his research paper, published by Harvard’s Center for International Development, he argued that a shift in the way manufacturing output is calculated was largely to blame for the inflated GDP figures. Subramanian marshaled alternative data, including vehicle sales and electricity consumption, to show that growth was about 2 percentage points lower on average from fiscal years 2012 to 2017.

Not only the GDP data have come under scrutiny. Before the general election, which Modi’s party convincingly won in May, the government was blindsided by the leak of an official report that showed the unemployment rate had hit a 45-year high in the fiscal year ended March 2018. Authorities were accused of suppressing the information to avoid a backlash from voters. Shortly after, more than 100 economists from India and abroad took the unusual step of drafting a petition raising concerns about the possibility of political meddling in India’s data.

One of them was Amartya Lahiri, who heads the Centre for Advanced Financial Research and Learning, a Mumbai think tank affiliated with India’s central bank. Lahiri says that, given India’s continued dependence on international capital to fund a shortfall in domestic savings and investments, the last thing the nation needs is uncertainty about key economic statistics. “The optics of the data ecosystem needs to be above reproach,” he says. “India needs to act now.”

Surveying a country of more than 1.3 billion people, many of whom work in mom and pop businesses that don’t pay taxes, is challenging enough. But the government invests just 0.2% of its annual budget in collecting economic statistics and has had a number of top officials quit in recent years in frustration over political interference in their work. India still doesn’t produce official reports for key metrics such as retail sales and housing starts. “There are so many aspects of the economy that are not covered,” says Sonal Varma, chief India economist at Nomura in Singapore. “Given the speed at which India is growing, it is very important to be able to measure better.”

Varma, like many of her investment banking peers, relies on a host of proxy indicators to estimate economic activity: for example, automobile and scooter sales for consumption; credit growth and corporate profits for investments; and freight and transportation for services industry growth.

India’s statistics ministry has disputed Subramanian’s findings. Pravin Srivastava, chief statistician, says the agency follows international standards in computing GDP. Several independent economists have attacked the research that formed the basis of Subramanian’s paper. In a subsequent publication, he defended his work while noting that he’d raised doubts about the official methodology in January 2015 when he formed part of the government. He also argued that it was doubtful India could have achieved such robust growth rates in the face of external and internal headwinds, including Modi’s decision in late 2016 to ban high-denomination currency bills, a move that triggered prolonged cash shortages.

For investors, the damage may be already done. “Foreign investors are concerned about India’s GDP data becoming politicized,” says Hugo Erken, a senior economist at Rabobank International in Utrecht in the Netherlands. “From the international perspective, the thinking is that where there is smoke, there must be fire.”

Subramanian, who’s now with the Washington-based Peterson Institute for International Economics, says India must repair the reputational damage by changing the methodology of calculating GDP and appointing an independent task force to ensure the veracity of the numbers.

Modi’s government has an incentive to act quickly: It’s preparing to stage India’s first sovereign bond offering in international markets. One prerequisite for successful sales, which could raise as much as $10 billion, will be greater transparency of official statistics. —With Vrishti Beniwal

©2019 Bloomberg L.P.