Arvind Subramanian’s calculation of GDP is flawed too, says economist Arun Kumar

Noted economist Arun Kumar said former chief economic advisor Arvind Subramanian is correct in saying that the rate of growth of Gross Domestic Product (GDP) has been overestimated in the last few years. Subramanian's methodology to gauge economic growth, however, may also not be correct — both being indirect methods to deteremine GDP, Kumar said on June 12, 2019. 

Subramanian, on June 11, wrote that the Indian economy might have grown at 4.5 per cent annually during 2011-12 to 2016-17 instead of the reported 7 per cent.

Kumar pointed out that the unorganised sector and its slowdown has not been taken into account by Subramanian’s paper or even into the government’s own calculations. India’s GDP growth rate could be only around 1 per cent if that is accounted for, he added.

“When we estimate the GDP we look at various sectors in the economy and we count the different sectors and sub-sectors on how much they contribute to the GDP. We then add it up, which requires a lot of data and methodology,” said the former Jawaharlal Nehru University professor. “But what Subramanian has done is use a simplified method than collecting data sector-wise. So the question is how correct is this 4.5 per cent figure.”

Subramanian, in his paper, compiled 17 key indicators for the period of 2001-02 to 2017-18:

• Electricity consumption
• Two-wheeler sales
• Commercial vehicle sales
• Tractor sales
• Airline passenger traffic
• Foreign tourist arrivals
• Railway freight traffic
• Index of industrial production (IIP)
• IIP (manufacturing)
• IIP (consumer goods)
• Petroleum
• Cement
• Steel
• Overall real credit
• Real credit to industry
• Exports
• Imports

“It’s an aggregate way of looking at it: seeing some key inputs in the economy like electricity, two-wheelers, air travel, etc and then using them to estimate what could be the size of the GDP. This is an indirect way,” he added.

Kumar highlighted that the correct method to calculate growth rate is to take the unorganised sector into account since economic shocks like demonetisation and Goods and Services Tax (GST) have affected the sector majorly.

“First there was demonetisation and before the economy could recover we had to bear the GST shock. That affects the unorganised sector because it has not been able to cope with the complexity,” said Kumar. “Before one could cope with that, we had NBFC shock (funding crisis of non-banking financial corporations) and the NBFCs are where the unorganised sector gets its loans.”

The government has been trying to push digitisation, but the unorganised sector has not been able to deal with it and hence is at the receiving end of continuous economic shocks, said the academician.

This has neither been taken into account by Subramanian’s paper, nor is it in the government’s GDP calculation, he added.

Kumar also questioned the validity of the inter-country comparison done in the paper. Subramanian estimated a relationship between a set of indicators and GDP growth and compared it with 71 high- and middle-income countries.

“Indian economy is not like most economies, especially like the developed economies. We have a large unorganised sector, which has 94 per cent employment and 45 per cent output. That kind of sector, which has so many small and micro units, doesn’t exist in other economies,” said the economist.

Economy India