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EAC-PM rejects Arvind Subramanian's claim on over-estimation of GDP

The EAC-PM asserted that India's GDP estimation methodology is on par with its global standards.

, ET Bureau|
Updated: Jun 20, 2019, 09.49 AM IST
Subramanian was the CEA in the finance ministry for nearly four years from October 2014.
NEW DELHI: The Economic Advisory Council (EAC) to the Prime Minister refuted former chief economic advisor (CEA) Arvind Subramanian’s assertion that India’s GDP was overestimated between FY12 and FY17. It said there seems to have been a “hurried attempt to draw conclusions” about India’s complex economy and its evolution, relying more on private agencies such as Centre for Monitoring Indian Economy (CMIE) while raising doubts about Central Statistics Office (CSO) data.

The EAC, in a detailed paper, asserted that India's GDP estimation methodology is on par with its global standing as a major and responsible economy while highlighting that Subramanian used 17 high-frequency indicators, but ignored the representation of the services sector (60% in GDP) and the agriculture sector (18%) in the analysis. The report is the latest attack on Subramanian’s findings, which were published last week by the Center for International Development at Harvard University.

“If anything, the weakness of Dr Subramanian’s attempt to suggest that the growth numbers are over-estimated confirms that the estimation process is robust to spurious criticism,” it said. “The fact of the matter is that India’s GDP methodology is consistent with internationally accepted standards and is in a continuous process of improvement.”

The paper, authored by economists Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Virmani, said the former CEA had overlooked tax data.

"For anyone who reads Dr Subramanian's paper, it is evident that he trusts CMIE but distrusts CSO... This blind trust in a private agency (CMIE) and blind distrust in a government institution that has served India (CSO) appears unwarranted for a neutral academic," it said.

Subramanian admits, the EAC noted, that “the results in the paper are by no means the final word.” However, the sweeping conclusions and broad policy implications he lays out seem to suggest that India needs to be alarmed, the EAC said.

Subramanian, who stepped down as the chief economic advisor last year, said in the research paper that India's economic growth rate had been overestimated by about 2.5 percentage points between FY12 and FY17 due to a change in methodology for calculating GDP. Subramanian served as the CEA in the finance ministry for nearly four years from October 2014. His paper, entitled ‘India's GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications,’ comes as concerns have been raised in various quarters about official economic data.

The EAC paper said a majority of the 17 indicators used by him have been taken directly from CMIE, which is not a primary source of information but collects it from different sources.

The paper said Subramanian chose to overlook tax data, arguing that “we do not use tax indicators because of the major changes in direct and indirect taxes in the post-2011 period, which render the tax-to-GDP relationship different and unstable, and hence make the indicators unreliable proxies for GDP growth.”

Unlike many indicators, the EAC said tax data is not collected through surveys or by agencies through arcane techniques. These are hard numbers and should be an important indicator of growth, it said.

“Further, there have been no major changes in tax laws until the end period in the author's analysis (March 31, 2017). GST was introduced on July 1, 2017,” it said. The author's logic of not using tax data appears to be a convenient argument meant to avoid inconvenient conclusions based on hard facts, the report said.

India's GDP estimation is by no means a perfect science, the EAC admitted. But it pointed out that Subramanian as CEA had presided over government economists and statisticians and is aware of the magnitude and complexity of the exercise involved in computing growth figures for the continent-sized, highly diverse, emerging economy.

“To consider attempting to approximate GDP of such a country on the basis of some correlations and four variables using simplistic econometric techniques and challenging the existing edifice of data collection is not only demoralising to those dedicated personnel but also technically inappropriate,” it added.

The process is better than it used to be and efforts are under way to improve it even further, the EAC said.

The government had earlier said the base year of the GDP series was revised from FY05 to FY12 and released on January 30, 2015, after adaptation of the sources and methods in line with the System of National Accounts 2008.

The new methodology introduced in 2015 is a testament to India’s intent to adopt the most modern global standards to accurately report its economic data, the EAC observed. India’s direction and pace toward the goal of accurate National Income Accounting is worthy of praise, it added. The complexity of computing GDP gets compounded in an emerging country of the size of a continent and highly diverse products ranging from agriculture produce to sophisticated satellites.

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