India’s 7.8 per cent GDP growth rate for the first quarter of the fiscal year is a completely credible number, and claims suggesting it is as low as 2.6 per cent are based on “bogus” statistical gymnastics. The methodology used to calculate economic output has been upgraded to match international standards, including the implementation of double deflators. While GDP figures undergo multiple provisional revisions as more granular data becomes available, the current 7.8 per cent figure accurately reflects strong underlying momentum in private investment and domestic consumption. The Federal spoke to former Chief Economic Advisor to the Government of India, Professor K. V. Subramanian, to break down the GDP debate, the credibility of official statistics, and why post-data revisions are a standard global practice.
7.8 per cent appears to be an impressive number. Are you convinced?
I am, for the simple reason that I have been there and seen the way in which the statistical methodology actually has been upgraded. In fact, on the IMF end, I had the privilege of being able to spearhead the upgrade towards the double deflator part.
Earlier, there were criticisms that India’s base year was old (2011–12) and needed to be updated. I was actually in the thick of it, and I have seen this, so I have no reason not to believe the number.
I don’t use asymmetry in my assessments. If the number is low, it is low; if the number is high, it is high. Some people don’t have any doubts about the methodology when the GDP growth number is low. But as soon as the number comes out a little higher, they start mixing it with some deflator—some concoction of real GDP and nominal GDP. That actually displays an absolutely needless set of gymnastics.
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The number clearly shows the reality, and if you open the hood, the increase in the investment part—the gross fixed capital formation at 11 per cent—is what lends credibility when put together with other statistics. Citigroup looked at the private capital expenditure being done by listed firms using the CMIE CapEx data, and they found that it is growing at around 12 per cent. The Reserve Bank of India’s data on bank credit is growing year-on-year at 20 per cent. The Index of Industrial Production on capital goods is growing at more than 15 per cent, and the construction sector is growing at around 16 per cent. When you put all those together, investment picking up is very good news for a longer-drawn growth cycle.
In the 2018–19 Economic Survey, we coined the term “virtuous cycle.” Every economy that has grown fast has grown fast through private investment.
Consumption, which accounts for about 58 per cent to 60 per cent of GDP, is also picking up. Commercial vehicle numbers have grown at around 18 per cent, and transport vehicle registrations are growing at high double digits. Consumption and domestic investment together make up almost 90 per cent of GDP. If these two sets of statistics are all growing at double digits, many in high double digits and some at 20 per cent plus, then obviously the average cannot be 2.6 per cent. The average has to be closer to what the reported number actually is.
If you take the two-year CAGR growth rate to account for base effects, it comes to 7.4per cent, which is also much closer to 7.8 per cent than to 2.6 per cent. That 2.6 per cent claim has since been jettisoned by critics and moved to somewhere around 5per cent. If the numbers change so quickly, there you have the story.
Former Economic Affairs Secretary Subhash Chandra Garg mentioned that he also does not believe the economy is growing at only 2 per cent, but suspects the 7.8 per cent figure is “dressed up.” He argues that you cannot revise a previous Q1 growth figure down from ₹86 lakh crore to ₹80 lakh crore and juxtapose it with ₹88 lakh crore to make the figure look bigger. Statistically speaking, can a correction of ₹6 lakh crore happen?
Think about an Indian company that has been using Indian GAAP accounting principles and now moves to US GAAP to match global standards. Research published in top accounting journals shows that when the accounting methodology is changed or refined, you will see a significant change in the numbers because the methodology is different.
Suppose a company’s profit was ₹100 crore under Indian GAAP last year. Now the company moves to US GAAP, and that profit number under US GAAP for last year goes down to ₹90 crore. For this year, under US GAAP, it is ₹100 crore. What that 2.6 per cent bogus claim is actually doing is comparing Indian GAAP of ₹100 crore last year versus US GAAP of ₹100 crore this year, which is completely comparing apples and oranges.
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This change happens because of the nature of the accounting methodology. What the firm sold and what costs it paid were already incurred last year. It is just that when you move towards a different accounting method, the treatment of some of those variables changes. That happens all the time. This claim is really not one that should be given credibility because it is absolutely incorrect.
If it is because of a changed methodology that we see these numbers, is it fair to compare a figure from an old methodology with a figure from a new methodology?
Suppose I measured my weight last year in pounds and it was 150 pounds. This year, I report my weight in kilograms and say it is 80 kilograms, and then claim I have lost weight by comparing 150 to 80. You are doing arithmetic using pounds and kilograms, which are two different units. You cannot do arithmetic on those two things.
That is exactly what the allegation does. It is classic cherry-picking. You cannot do arithmetic with apples and oranges. Like-for-like comparison is a sine qua non for any interpretation, and that essential Econ 101 principle has been violated here. Referring to the 2.6 per cent figure is like putting lipstick on a pig—it remains a pig. It is a metaphor for a bogus claim.
Subhash Chandra Garg also noted that Q2 has a correction of about ₹5 lakh crore, which he claims will again lead to an inflated GDP number. Why do GDP numbers have to be revised by such large amounts? Is the government unsure of its earnings, or is this based on advance estimates?
GDP is measured by taking economic transactions. If you eat a bowl of khichdi in a restaurant and pay ₹100, that is an observed transaction. If the price goes up by 10 per cent next year, you pay ₹110. But to make that khichdi, rice and dal were required, which may have cost ₹70 last year and only increased by 5 per cent this year.
GDP takes nominal prices—prices that you and I pay for goods and services—and adjusts them for price changes to arrive at real quantities. The real quantity last year versus this year is compared apples-to-apples to report real GDP growth.
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In a country like India, there is a large informal sector. Because you want to count that activity, you use proxies. The process of changing the GDP methodology is to try to capture that informal activity in a better, consistently improved manner.
The double deflator methodology—which I was part of implementing as part of the IMF—takes the price of the output, deflates it at the right price change for output, and then does a similar deflating step for intermediate inputs like rice and dal. The double deflator is a standard, cutting-edge methodology used globally that the IMF advocated for India. India has implemented it, updated the base year, and improved granular metrics to better capture economic activity.
Why should there be such a massive correction or difference within a year between an estimate and a revision? What if the 7.8 per cent figure gets revised down six months later?
This is a provisional estimate. The first estimate that comes out is based on a certain set of measures—maybe 50 or 60 metrics. As time proceeds, more data comes in, expanding the metric pool from 50 or 60 to 70 or 80.
These changes undergo revisions up to five times as more data comes in. The revisions happen sometimes on the upward side and sometimes on the downward side; it is not a one-way street. As better data comes in, the measure gets refined.
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If you suspect you have a fever, a friend might touch your forehead as a first proxy and estimate your temperature is 100°F. Then you bring out a thermometer—a much better metric—and measure it accurately at 100.5°F. Your friend’s hand was the first proxy giving a provisional metric, and the thermometer refined it.
As better data comes in, the GDP measure gets refined, and not necessarily in one direction. As of today, the correct estimate for the growth for Q1 of this year is 7.8 per cent. That is an absolutely correct statement to make. When the revised estimate comes next year with additional data, that will be the correct estimate at that point in time. Every country does this.
It takes a few seconds to confuse people, but bringing clarity takes effort.
Is this standard global trend and process similar to how budgets have budget estimates and revised estimates?
Exactly. You budget that you will spend a certain amount of rupees on your household this month, but you end up spending slightly more or less. That becomes the actual number as more information comes in and you update it. It is as simple as that. Those who are trying to create confusion are taking a simple, standard process and trying to push specific narratives.
Subsequent revisions often do not get as much public attention as the initial provisional figures. Should revised figures receive equal analysis?
This happens in every country. A provisional figure comes out and receives a lot of media attention. The revised figures should also be analysed as much, rather than looking only at the provisional numbers. As of today, 7.8 per cent is the official provisional assessment for Q1 growth.