How Reliable and Accurate is India’s GDP Data?
“The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer,” wrote Arvind Subramanian, the high-priest of economic advices to the first Modi Government, in a recent newspaper article casting a shadow of doubt over India’s economic growth numbers in this decade.
It is ironic that an economist who was at the centre of policy-making during the last five years should now turn around to question the figures based on which he himself was making suggestions for economic reforms and pushing for the county’s economic development.
National income or the Gross Domestic Product (GDP) measurement has always been fraught with the risks of misstatements even in developed economies. Classical texts on the subject state very clearly at least two problems in the measurement of national incomes.
Some outputs are not properly measured because they are not traded or there is no market measure for them. The value of labour put in by housewives and inside the house is not added to national income.
The other is that the value of trade, goods and other services that are transacted/ produced/rendered informally without billing or going through the formal sectors.
In India, one can very well imagine the exclusions that occur due to the non-counting of the value of the labour of millions of people, especially women in rural and urban households who contribute to the output but these are not reckoned for calculation of the GDP.
While the above should normally have been reckoned as factors of production, the informal businesses on waysides/petty shops/saloons/other aligned service centres in millions of smaller towns and even in the Metros which would constitute factor payments are also excluded from our GDP calculations.
GDP is defined as the value of all final goods and services produced in the country within a given period. Using 17 key indicators for the period from 2001-02 to 2017, Arvind Subramanian compares or correlates the GDP figures for India during this period and finds divergences between these indicators and economic growth during 2002-11 and 2012-16.
The seventeen indicators are given in Box 1. He also relates these indicators to the GDP figures of 71 high and middle-income countries to establish the fact that these 17 are reliable indicators of growth. His conclusion on the basis of the study is that we have overestimated GDP growth by 2.5 percentage points per year between 2011-12 and 2016-17.
A reading of the academic paper produced for the Center for International Development at Harvard University indicates rigour in analysis based on the adopted approach. I am not an academic to sit in judgement over the findings of the paper, but there are a few questions that arise from the conclusions that he postulates from the analysis.
- The size of India’s informal sectors in the economy are estimated to be quite large. In the absence of reliable data, isn’t the debate about whether growth was 7% or 4.5% itself ring hollow because the methodologies in both would be based on the formal sector alone?
- According to a report of the International Labour Organisation, published in 2018, about 81% of India’s employed population earn their livelihood from the informal economy. How do we account for the output of this large workforce, which is a major factor of production?
- As household work is excluded, what is its impact on the GDP figures?
- Household labour is a substitute for goods and services that would be otherwise purchased for value. Even under conservative estimates, the value of unpaid labour has been assessed at 50% in countries like Australia and the United Kingdom.
- What about work done in the voluntary sector which may be adding value to goods and services without it being priced and billed?
- For instance, if your baby were to be left in a day-care centre with monthly payments, that would be part of GDP, but if your mother or wife were to look after the baby at home, that work would not be counted
The former Chief Economic Adviser’s article thus raises more questions rather than providing answers to the complicated task of the compilation of national income. He himself says at the end of the newspaper article that throughout his tenure he grappled with conflicting economic data. “We raised these doubts frequently within government, and publicly articulated these in a measured manner in government documents…”
After a briefing on the global economic crisis of 2008, Queen Elizabeth is reported to have asked “Why did nobody see it coming”? In reply, a professor at the London School of Economics said, “At every stage, someone was relying on someone else and everybody thought they were doing the right thing”
Arvind Subramanian’s ‘meaculpa’ is a damning self-indictment and a wake-up call for India’s statisticians and economists.