PM’s Economic Advisory Council Vs Arvind Subramanian: The GDP Debate Continues
The Prime Minister’s Economic Advisory Council has issued a detailed rebuttal to a claim by former chief economic adviser Arvind Subramanian that India is over-estimating GDP growth.
In a paper titled ‘India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications,’ issued last week, Subramanian claimed that annual average GDP growth was about 4.5 percent between 2011 and 2016, instead of the 7 percent estimated by the Central Statistics Agency.
On Wednesday, economists from the Prime Minister’s Economic Advisory Council, rebutted the conclusions of Subramanian’s paper. “A critique of official GDP estimates must specifically critique coverage or methodology, the author does neither,” the paper said.
The economists involved in the paper include Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Virmani.
Some of the issues on which Subramanian and the PMEAC differ are detailed below:
Correlation of GDP With High Frequency Indicators
Subramanian, in his paper, says that 16 out of 17 commonly used high frequency indicators were positively correlated with GDP growth before 2011. However, post-2011, 11 out of 17 indicators are negatively correlated with GDP.
The indicators used included the Index of Industrial Production, credit growth, exports and imports, among others. Subramanian refrained from using tax data on account of major changes in direct and indirect taxes in the post 2011 period.
The PMEAC disagreed with this approach. The national income accounting framework estimates value addition of different economic activities, and not merely changes in indicators of these activities. It is, therefore, conceptually incorrect to relate levels of GDP to levels of indicators, it said.
The PMEAC adds that Subramanian does not include any indicators that represent the services sector, which accounts for 60 percent of GDP, and agriculture, which accounts for 18 percent of GDP. They acknowledge that these indicators may not be easily available but go on to add this flaw has not been accounted for.
The Council also rebuts the argument regarding use of tax data, stating that the GST was introduced only in July 2017- after the end period of the author’s analysis.
What The Mismatch Suggests
Subramanian treats the change in correlation between these high frequency indicators and GDP as a “prima facie” cause of concern. He then looks across countries and checks to see whether these indicators are closely correlated with GDP growth for a broad and comparable set of countries.
His study concludes that these variables are closely correlated across most of the countries included in the study. India, along with China and Ireland, are outliers. Subramanian, however, argues that growth in China has been suspected to have been over stated and Ireland has its unique set of issues.
The PMEAC argues that just because India is an outlier cannot automatically lead to the inference that India’s growth has been over-estimated. In general, results based on cross country regressions are generally problematic, the council argued. “India is unique in many ways - it isn’t resource rich and has no history of manipulating its exchange rate for its benefit,” it said.
The council also said that the cross-country analysis is only based on four variables. Once again, these variables do not include any from the services and agriculture sectors.
Conclusions On Growth
Subramanian used his analysis to conclude that GDP growth between 2011 and 2016 may have been over-estimated by about 2.5 percent per year.
So, instead of the reported headline growth of about 7 percent between 2011 and 2016, the results in this paper suggest a range for actual growth of between 3.5 and 5.5 percent.Arvind Subramanian, Former Chief Economic Adviser
The PMEAC paper, however, argues that these could be many other reasons for the lack of correlation between high frequency indicators and the GDP. Thus, the conclusion that GDP growth has been over-estimated by a certain quantum is not accurate.
Subramanian can certainly argue that a seven percent growth claim has a smell problem. But his 4.5 percent estimate fails the smell test too. India has many problems but displays nothing like the economic disaster that 4.5 percent growth would imply.Economic Advisory Council to the Prime Minister