GDP Data Revision: Eat Your Cake, Don’t ‘Cook’ It
Unreliable statistics are worrying, especially for emerging economies who can easily lose the support of international investors.
In the Netherlands we have a saying: trust comes on foot, but leaves on horseback which basically means that trust is hard to gain but easy to lose. I am sure there is an Indian version of the saying, but I doubt if the government knows of its existence. In just a matter of months, a number of developments involving the Indian government have eroded India’s policy credibility on several fronts. Of course, this week all eyes have been focused on the unexpected resignation of Urjit Patel as governor of the Reserve Bank of India and his replacement by Shaktikanta Das, a government-minded bureaucrat with a background in history, who could potentially be much more compliant with government demands. In the heat of the moment, one might almost forget that the government already had another credibility issue that has not been resolved yet, and I am referring to the gross domestic product back-series here. Although the RBI-government spat will likely also surface again in the coming weeks, the GDP back-series issue is an equally important one to watch. Like with cooking, it is the combination of ingredients that matters for the quality of the meal, which in this case is India’s policy credibility.
On Nov. 28 the Central Statistical Organisation released the official back-series on India’s GDP. In 2015 the CSO revised the Indian GDP data, using FY2011-12 as the base year. The rebasing operation in 2015 resulted in Indian GDP series only being available from 2011 onwards. The GDP back-series encompass the revised GDP data for years prior to 2011.
In June, a special committee assigned by the National Statistical Commission already released GDP back-series showing that economic growth in fact exceeded the old figures. The opposition seized the opportunity to attack the government, underlining that under Congress-led United Progressive Alliance governments, India topped 10 percent growth not once, but twice. Ultimately, the July back-series were labelled as being ‘preliminary’ and more work had to be done.
Now, the final GDP back-series show that growth was much lower during the UPA regime. As expected, the opposition rushed to accuse the Modi government of manipulation of GDP data.
Why Would The Government Want To Rig GDP Statistics?
The big question is if the government has been pulling strings in order to rig the GDP back-series. The government was pretty relentless in pressuring the Reserve Bank of India to relax loans restructuring and accept the installation of a panel which is going to re-assess the capital framework, which resulted in the exit of governor Patel.
The question is: if the government is willing to undermine the independence and credibility of the central bank for political purposes, why wouldn’t it be prepared to undermine the independence and credibility of India’s statistical office?
What initially started as government interventions to tip the scale in the BJP’s favour in the run-up to the general elections next year, now seems to be backfiring. In the most recent five state elections, the BJP lost control of three. This could stall progress on the implementation of the BJP’s business-friendly reform agenda, which will likely result in levelling off of potential growth as well.
The Proof Of The Pudding Is In The Eating, And Not In The Cooking
There has been an intense debate in the media whether the methodology to calculate the back-series is flawed or not. Some have raised questions about how data from the Annual Survey of Industries was replaced with financial company data from the MCA-12. Others state that capital productivity miraculously has risen during the Modi period. But there also voices defending the new back-series. We expect the debate to flare up in the coming weeks again. To assess whether the data helps economists make a good diagnosis of the economy, let’s apply a very simple test.
First, we have estimated a quarterly GDP model for the period January-March 2012 to July-September 2018, based on the growth of four economic drivers: car registrations, oil consumption, foreign direct investment, and industrial production. We have experimented with other drivers as well, such as loans growth, electricity production, tourism, but these additional factors did not yield any improvement of the model. Our GDP model is subsequently used to back-cast economic growth for the period FY06 to FY13.
- For FY10 and FY11, the model outcomes are in line with the final back-series rather than the old series.
- However, for FY06 to FY09, the model predicts even higher GDP growth than the old series.
This at least indicates that the new back-series are not aligned with the development of some other key economic data.
But we have to stress here that the GDP model fit is still widely variant, which surely underlines how difficult it is to economically capture what is going on in India for anyone.
Investor Sentiment Is Like China In Your Hand…
As far as the quality of statistics is concerned, India has to be careful not to go down the same route as that other large fast-growing Asian emerging economy: China. In 2007, now-premier Li Keqiang, then the party chief in Liaoning, told the U.S. ambassador that regional GDP figures were ‘man-made’.
Unreliable statistics are worrying, especially for emerging economies who can easily lose the support of international investors.
In the upcoming years, India and China remain heavily reliant on foreign direct investment if they want to avoid the middle income trap and live up to their growth strategy, which conveniently has the same name in both countries as well (Make in India/Made in China 2025).
What Should The Modi Government Do?
We have no reason to doubt the GDP back-series were produced according to the best methodologies available and the team of statistical professionals involved has been conscientious in their way of operating. The problem for Prime Minister Modi is that the discussion has been politicised. So what can he do to limit the damage? He has three options.
- The Modi government can withdraw the back-series, something which has been publicly advocated by even one of the leading newspapers in India. This would definitely result in loss of face and could even be framed by the opposition as a confession of foul play. Definitely a no-go.
- Modi and other government officials can keep defending the back-series, as has been the case so far. The problem is that this won’t solve anything, as Modi will not be able to put the genie back in the bottle. Many people will continue to question the government’s credibility in this matter, especially since it has already lost a great deal of credibility in the spat with the RBI.
- This is the best option: Modi should hire an international team of top statisticians to re-assess the back-series together with the Indian experts. Sure, there have been consultancy sessions with international experts, but these apparently have been insufficient to convince the public of the robustness of the current back-series.
The international arbitrage team should be hired from the one country that produces the single best statistics in the world: the United States. In exchange for some more Indian geopolitical support, I am pretty sure that President Trump will be more than happy to send over a team of his top statisticians to look at those ‘phony numbers’.
Hugo Erken is Senior Economist at Rabobank; Country Analyst for North America, Mexico and India — RaboResearch.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.