GDP over-estimation argument is flawed
Mains Paper 3 : Economy
Prelims level : GDP
Mains level : GDP growth estimation mechanism
- The analytics used by Arvind Subramanian is incorrect on a number of
- Arvind Subramanian has written a working paper (‘India’s GDP Mis-estimation:
Likelihood, Magnitudes, Mechanisms, and Implications’) in which he argues
that “actual GDP growth” may have been 4.5 per cent between 2011-12 and
2016-17, instead of the 7 per cent official estimate.
Arguments from Subramanian
- 17 “real indicators” are strongly correlated with GDP growth measured
using the old 2004-05 series methodology but not with the new (2011-12)
- The growth rates for these indicators are “substantially lower in the
post-2011 period than before” and
- In a cross-country regression that relates GDP growth of 70+ countries
with just four indicators credit, electricity, exports and imports there is
an econometric convergence between these and the official GDP estimates
before 2011, but not after.
- GDP estimates are generated using a publicly available methodology that
is well documented, and is based on a comprehensive estimate of all economic
activities. GDP estimates use indicators to generate advance estimates, but
not final numbers. Certainly, no cross-country regressions are used in
generating GDP estimates.
Analytics used by Subramanian
- The analytics used by Subramanian to argue over-estimation is flawed.
- First, GDP estimates are always reported at current prices. Price
deflators are then applied to calculate real GDP. But since Subramanian only
compares real GDP growth estimates, there is no foundational basis to speak
of “over-estimation,” since he has produced no alternative estimate of
current price GDP.
- Second, 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. High frequency indicators can,
at best, signal changes in different sectors. They are not estimates of
value addition by these sectors.
- Third, almost all the indicators used in the study are for the organised
and commodity-producing sectors. Thus, the indicators inadequately cover the
GDP base, significantly, services.
- Fourth, when assessing mis-measurement in national income, researchers
examine data-related problems in moving from an establishment to an
enterprise approach, changes in sampling frames, changes in definition,
sampling and non-sampling errors, and other coverage issues in available
data sets. Subramanian does nothing of the sort.
- For these reasons, the paper has no analytical basis to opine on
anything as fundamental (or grandiose) as over-estimation of India’s GDP
- Subramanian argues that for his 17 indicators, the correlation with GDP
growth reduces post 2011-12. However, such a change in correlation does not
automatically imply an over-estimation of GDP.
- Part of the reason why the indicators show a low correlation with GVA
estimates in the new series is because the composition of GVA (in terms of
coverage and sectoral reclassification) has changed substantially.
- Subramanian does not control for this he cannot, because composition
plays no role in his argument.
His assumption on GDP growth estimation
- Subramanian’s cross-country regression exercise involves underlying
assumptions which are not acknowledged.
- He assumes (except in India) that there are no significant differences
in how GDP is estimated in the countries chosen, such that the dependent
variable can be regarded as reasonably homogeneous.
- The fact that India is an outlier cannot automatically lead to the
inference that India’s growth has been over-estimated, simply because the
drivers of India’s growth may have changed in the second period.
Not backed by theory
- But these things make no appearance in Subramanian’s argument. He does
speculate on the causes of deviation (in his misplaced quest to establish
over-estimation) but his speculations refer primarily to the use of
deflators in organised manufacturing and in the services sector.
- These deflator issues are to do with moving from nominal to real GDP,
and Subramanian leaves these issues for future research.
- An exercise of this nature could add value if grounded in a theory of
growth for countries like India, to test whether India conforms to the
posited theory pre and post 2011. But there is no theory backing this,
purely data driven, exercise.
- Referees’ reports would likely raise these issues, inter alia, and an
improved paper would no doubt emerge in due course.
- But in the working paper and press article, there is no analytical
justification for the grand claim that GDP is over-estimated.
- For the rest, technical flaws notwithstanding, it confirms what we
already know, that GDP growth has slowed in recent years. That’s about it.
- The change in GDP estimation procedure was not done for the fun of it
(the implicit assumption) but because there were compositional changes that
had to be taken into account.
- These changes include wider coverage of activities (particularly in the
manufacturing sector), reclassification of many sub-sectors, and use of new
databases. They have, to some extent, altered the relation between value
addition across sectors and volume based (physical) indicators.
- These should be examined critically and, in the case of the MCA
database, this has been done by other scholars.
Q.1) Which of the following is/are correct with reference to National
Small Savings Fund (NSSF)?
1. Its components include Postal deposits and Social Security Scheme's
2. It forms the part of the Public Acount of India.
Select the correct answer using the code given below.
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q.1) What are the analytics used by Subramanian on GDP growth estimation?