Arvind Subramanian was the chief economic advisor (CEA) to the Government of India from October 2014 to June 2018. Among other things, he became well known and was praised deservingly for his Economic Surveys. He made that document interesting, useful and accessible. He also took it to the country by hosting online lectures on the topics covered in the survey. A former central banker told me that he was a model CEA.
Fast forward to 12 June 2019. Arvind Subramanian wrote an article in The Indian Express summarizing his findings on the econometric work he had done on India’s gross domestic product (GDP) growth estimates. His results suggest that, on average, India’s GDP could have been overstated by a magnitude of about 2.5 percentage points every year since 2011, amounting to a cumulative 19-21% during the whole period (2011-18). However, in his econometric investigation, he excludes data for 2017-18 and 2018-19.
Subramanian has been criticized by commentators on both sides of the political divide in India. Those who are opposed to the Narendra Modi-led Bharatiya Janata Party (BJP) government are critical because he did not publicize his results before the genera election. It might have strengthened their hands. Or, so they think. Unlikely. But, that is their grievance.
The pro-BJP commentators are upset that this paper has spoilt the “feel-good” air that they are basking in, post-election victory. There is also the unstated anger that his results suggest that the over-estimation of GDP growth, if broken down on an annual basis, is more in the post-2014 years than in the pre-2014 years (up to 2011) because official growth estimates between 2011 and 2014 are lower than the annual growth estimates post 2014.
Moreover, has he given a handle to the perpetual critics of India like the newspaper, The Economist? It recently concluded that India was fast catching up with China in the production of dubious statistics. That is a damning comment. China remains an outlier and the political motivation is hardly disguised. There are also other questions on whether rules that apply to civil servants on public comments should apply to non-civil servants who have worked in government.
Most of these questions are interesting but not necessarily important.
Shooting the messenger
In the process of over-analysing the messenger behind the message, the message may be getting lost. That is a pity. In fact, Subramanian’s timing is praiseworthy. By releasing his study after the elections were over in India, he had shown himself to be apolitical. In fact, construing his work as an attack on the government is a tacit concession that the issue is not statistical but political.
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I have gone through Arvind’s paper carefully more than once. His conclusions—based on cross-country evidence, India’s growth rate has been overstated by 2.5 percentage points between April 2011 and March 2017—are in the right direction. In other words, he gets the direction right if not the magnitude.
He has merely invoked the spirit of “difference in difference” approach (via a simple cross-country statistical regression). Did the difference in methodology adopted since 2011 make a difference only to India? Well, parts of Subramanian’s paper do not invoke cross-country analysis. In other words, he has not just engaged in an “unusual exercise” of cross-country regressions. He has also analysed India independently.
I had done a similar exercise in 2016 (Divining India’s True Economic Growth - Part 1 and Part II). These two papers show that the GDP growth figures do not accord with growth in many other indicators of the real economy. The analysis was done using several indicators and the conclusions were clear. I did not undertake an econometric investigation. So, my result was not quantifiable. It was descriptive in nature. I concluded—without any statistical estimation—that India’s real GDP growth rate might be overstated by 1-1.5 percentage points. That is, the true growth rate of the economy might be between 5.5% and 6.0%.
One could ignore Subramanian’s cross-country and panel regressions and undertake an “India-only” exercise, but there is not simply enough data. But, the evidence is clear in his and in my works cited above. There’s no point in being in denial about it.
More recently, 108 economists/social scientists in the country expressed concern at some of these and other issues pertaining to India’s official statistics. Then 131 chartered accountants countered them. Specifically, with respect to economic growth numbers, the economists were on more solid ground. It was not just India’s domestic bank credit growth that had decoupled from GDP growth numbers post 2011 compared to pre-2011 years. Growth in the overall credit to the private non-financial sector in India from all sources, available from the Bank for International Settlements (BIS), had fallen dramatically from the fiscal year beginning April 2012. In fact, since 2014, it has grown at a single digit rate. Further, BIS publishes a statistic called “Credit to GDP” gap. It measures the difference between the actual growth in overall credit/GDP ratio and the trend growth. For India, this ratio was strongly positive in the years before 2008, meaning faster (even undesirable) growth in demand for credit. It began declining after 2008 and turned negative in 2014. It remains in negative territory.
These data make it hard to believe the real GDP growth numbers of 8% and 8.2% for 2015-16 and 2016-17, respectively, years that witnessed demonetization, introduction of the goods and services tax, implementation of the Insolvency and Bankruptcy Code and the Real Estate Regulation Act—all of which dampen growth rates in the short-term due to the uncertainty and the change in behaviour that they induce in economic participants.
An unlikely outlier
Statistician Pronab Sen questioned Subramanian’s investigation on the basis that it is purely based on output variables and does not account for productivity gains. He pointed out the following: “The paper’s finding means that there has been an equivalent improvement in productivity. But this would also mean that the older series underestimated growth in the years prior to 2011-12.” However, few months ago, in a back-casting exercise, GDP growth estimates for the years 2005 to 2012 were revised down. Further, Sen is not exactly correct in calling the difference between Arvind’s estimate and reported growth an improvement in productivity. More on that later.
Before 2008, India experienced an economic growth boom due to massive capital inflows, credit growth, capital investment boom and export growth. Many other nations did so too. Post 2008, global trade volumes have slumped. Countries—developing and developed—briefly recaptured their growth rates of pre-2008 years due to stimulus. Some of the stimulus was unsustainable as India found out in 2013.
That is why most of the countries have struggled with economic growth since then. In fact, post 2014, leading emerging economies have suffered lower growth. This is consistent with what Ruchir Sharma wrote in The Rise and Fall of Nations in 2016: “For emerging countries with low average incomes—less than $5,000 a year—the definition of good, solid growth should be revised downward by at least 2 percentage points, to any rate above 5 percent… it may be some years before we see another major economy put together a sustained run of growth at 7 percent or better. It is critical that leaders and the observers who judge them adopt a more realistic definition of success…”
Only India has been an exception in spite of the introduction of many potentially growth-unfriendly and demand-unfriendly structural but long-term positive and essential structural reforms. That must raise eyebrows.
Taxing matters
Harsh Gupta has written a thoughtful piece in The Indian Express drawing attention to the fact that India’s tax collections have grown robustly since 2014, arguing that if Arvind’s growth estimates (mid-point of 4.5%, between 3.5% and 5.5%) were accepted, the tax-to-GDP ratio would be much higher. He is right unless the tax data were fudged too. Rather unlikely. Tax collections are realized in cash and the government has to transfer a portion of it to states too.
But, robust tax collection could well be part of the problem. That the tax collection mechanism became so active and coercive might be one of the contributors to the private sector uncertainty and investment funk. Indeed, even many sympathizers of the Modi-led government are of the view that “tax terrorism” was pursued with greater vigour post 2014.
For example, between 2014 and 2016, when the price of crude oil slumped, the government did not pass on the decline in the price of crude oil to the Indian public. Instead, it loaded up additional taxes on the crude oil and ensured that the final retail price of petroleum products was only marginally lower, if at all. Then some ask whether the smoother flow of goods thanks to improved infrastructure is captured in GDP data.
There are three responses to these challenges. One, all these changes should be captured in profitability data. They have not. Second, export growth would be better if there is a renaissance of productivity. That is why despite the slump in global trade volumes, countries like Bangladesh and Vietnam have done better than India with export growth.
Three, ceteris is not paribus: Even as GST related improvements are happening to the movement of goods in India, the power sector (independent power producers) has gotten into trouble due to lack of raw material availability at the expected prices and due to low price realization from buyers or non-evacuation of power at agreed prices. Then, the non-banking financial sector has gotten into trouble and has stopped lending. Finally, what has grown rapidly even amidst overall tepid bank credit growth is growth in credit to households including credit card or revolving credit. That is for consumption purposes. That is not the stuff of productivity improvement.
Only if other things remained equal and then GST-triggered productivity gains occurred at the margin, one can speculate on their positive impact on growth. Indeed, if productivity growth was behind India’s estimated 8% GDP growth in 2015-16 and in 2016-17 despite all other demand-side indicators signalling lower growth, then, with credit growth improving, elevated productivity in the economy should be driving economic growth even higher. But, the growth rate is estimated to have declined to 7.2% in 2017-18 and further to 6.8% in 2018-19. In its latest monetary policy review, the Reserve Bank of India revised downwards its GDP growth expectation for 2019-20 from 7.2% in April to 7.0%.
In conclusion
Post 2008, emerging economies are not the same. It is futile to keep talking about the 2008 crisis as the North-American or the Atlantic crisis. Emerging economies—including India—are as, if not more, worse off as developed nations are. There is a need to rethink the facile conclusions about the momentum of economic activity and the balance of economic power shifting inexorably towards the East and prepare accordingly to negotiate and deal with the West.
Reporting accurate economic growth is a matter that transcends political parties and governments in office. There is more at stake. Instead of arguing about it, it is far easier and more effective (lasting effect) to make available the CSO data and methodology to independent statisticians for verification. Only then will the controversy end. It is possible that the failure to accept a lower growth rate has actually prolonged the growth stagnation. The government could have easily asked the CEA or the Department of Economic Affairs to come out with such an exercise as soon as the controversy about GDP growth estimates erupted in 2015. That would have made both monetary and fiscal policy more responsive in the last four years.
In short, it is better to pay heed to the overall message even if its specifics are open to challenge. Focusing on the messenger and his motives is undoubtedly interesting but not important.
The writer is the dean of IFMR Graduate School of Business (KREA University). These are his personal views.
