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GDP estimation: EAC-PM defends methodology, says ex-CEA cherry-picked indicators

GDP estimation: EAC-PM defends methodology, says ex-CEA cherry-picked indicators – The Financial Express

By: FE Bureau |

New Delhi | Published: June 20, 2019 3:50:42 AM

The Economic Advisory Council to the Prime Minister (EAC-PM) on Wednesday scotched former chief economic advisor (CEA) Arvind Subramanian’s claims of a massive over-estimation of India’s economic growth from FY12 to FY17.

Also, they said, GDP is rightly estimated in both periods and the correlations of indicators change with time (foreign tourist arrivals, for instance).

The Economic Advisory Council to the Prime Minister (EAC-PM) on Wednesday scotched former chief economic advisor (CEA) Arvind Subramanian’s claims of a massive over-estimation of India’s economic growth from FY12 to FY17.

The EAC-PM said Subramanian’s conclusion was based on “cherry-picking” of indicators, ignoring services and agriculture that make up for roughly 78% of GDP.

In a research paper earlier this month, Subramanian had claimed: “Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7%. We estimate that actual growth may have been about 4.5% with a 95% confidence interval of 3.5-5.5%.”

In a note titled “GDP estimation in India — Perspective and Facts”, five economists —Bibek Debroy, Rathin Roy, Surjit Bhalla, Charan Singh and Arvind Virmani — rejected Subramanian’s methodology, arguments and conclusions.

Also, they said, GDP is rightly estimated in both periods and the correlations of indicators change with time (foreign tourist arrivals, for instance).

So, despite high growth levels of an indicator, “its correlation with GDP can be different in different periods”.

“The flipping of trends on selective basis is nothing but business as usual”, they said. Several indicators were negatively correlated with GDP growth in the 1980s and 1990s as well, they added.

The economists wrote: “The author (Subramanian) mentions that the motivation of his paper is not political and is focused on technical aspects.”

The economists added: “However, given the fact that his paper lacks rigour in terms of specific data sources and description; alternative hypothesis; rationale of equation specifications, use of dummies, and robustness-check diagnostics of estimated equations; and choice of countries in the sample and a specific list, it would not stand the scrutiny of academic or policy research standards.”

The former CEA, they stressed, didn’t specifically critique coverage or the new methodology for the computation of national income, with 2011-12 base year.

The economists highlighted that 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.” Majority of these indicators have been taken by Subramanian directly from CMIE, a private agency that is not a primary source of information but collects it from different sources, they said.

Further, a cursory look at the indicators chosen by the former CEA suggests a strong link with industry indicators (a sector that contributes an average of 22% to India’s GDP), while the representation of services (60% of GDP) and agriculture (18% of GDP) is as good as missing. “It is difficult to believe that indicators in the services sector would not correlate with Indian GDP.”

While Subramanian said tax indicators were not used because the tax-GDP relationship was unstable due to post-2011 changes, the economists noted that while the former CEA’s period of analysis ended on March 2017, the only major tax change (GST) was introduced on July 1, 2017. Tax data, they insisted, are hard numbers and should be an indicator of growth.

The economists argue that a weaker correlation between a select few indicators and GDP growth would not “necessarily signal an economic slowdown; but only that the contributors to growth changed significantly post global financial crisis”. “For one thing, it would then imply a structural break in 2008-09, and not in 2011-12.”

The new GDP series in the context of better availability and reporting of data — MCA 21 (in place of ASI) and adherence to the Systems of National Accounts (SNA) template — is tending to be the global norm (India is not an outlier). Under the new methodology, on balance, more countries had witnessed increases in GDP growth than decreases. But an increase doesn’t make the growth data untrustworthy, the economists stressed.

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Source: Financial Express