Arvind Subramanian, Narendra Modi government’s former chief economic adviser, has deduced that India’s economic growth rate has been overestimated by around 2.5 percentage points between 2011-12 and 2016-17 due to a change in methodology for calculating GDP.

India’s gross domestic product product (GDP) growth rate between this period should be about 4.5 per cent instead of the official estimate of close to 7 per cent, he said in a research paper published at Harvard University. “India changed its data sources and methodology for estimating real GDP for the period since 2011-12. This paper shows that this change has led to a significant overestimation of growth,” he said in the paper.

The paper comes amidst controversy over the country’s economic growth under the new GDP series. The revision in the methodology happened during the first term of the Modi government.

“Official estimates place annual average GDP growth between 2011-12 and 2016-17 at about 7 per cent. We estimate that actual growth may have been about 4.5 per cent with a 95 per cent confidence interval of 3.5-5.5 per cent,” he said.

Manufacturing is one such sector where the calculations have been largely mismeasured, wrote Subramanian, who quit as the chief economic adviser in August last year before his extended tenure was to end in May 2019.

He said the implication of this is: “Macro-economic policy too tight. Impetus for reform possibly dented. Going forward, restoring growth must be highest priority, including to finance government’s laudable inclusion agenda. GDP estimation must be revisited.”

Last month, official data showed that economic growth slowed down to a five-year low of 5.8 per cent in January-March, pushing India behind China, due to poor showing by agriculture and manufacturing sectors.

“So, post-global financial crisis, growth in India, solid not stellar,” he tweeted. He said the evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust.

“Lending further credence to the evidence, part of the overestimation can be related to a key methodological change, which affected the measurement of the formal manufacturing sector. These findings alter our understanding of India’s growth performance after the global financial crisis, from spectacular to solid,” he wrote in the paper.

According to Subramanian, two important policy implications follow: “The entire national income accounts estimation should be revisited, harnessing new opportunities created by the goods and services tax to significantly improve it; and restoring growth should be the urgent priority for the new government.”

The BJP government had in January 2015 updated base year for GDP calculation to 2011-12, replacing the old series base year of 2004-05. Using this, in August last year the growth numbers were recalibrated by the Sudipto Mundle Committee set up by the National Statistical Commission. This dumped up growth during the Congress-led UPA years based on the so-called production-shift method.

The government, however, dumped this calling the numbers experimental and not actual. It in November 2018 “recalibrated” the economy for the years 2004-05 to 2011-12, pulling down the GDP growth in UPA-era.

In the period before 2011, manufacturing value added in the national accounts used to be closely correlated with the manufacturing component of the Index of Industrial Production (IIP) and manufacturing exports. 

However, according to Subramanian, this link has broken down. He said his analysis was based upon 17 key economic indicators for the period 2001-02 to 2017-18 with a higher interdependence with the GDP growth. “The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer,” he says in the paper.