Over Estimation of GDP!

Mr. Subramanian, former CEA of India, launched a research paper stating that GDP estimation for the period post-2011 may have been subject to overestimation. According to Mr. Subramanian, there is considerable evidence to substantiate this assumption which in turn could lead to a much shorter GDP percentage in contrast to what is officially stated by the Government of India. This paper has answered three main questions

  1. Is there any misestimation of GDP for the period after 2011?

To answer this question, Mr, Arvind Subramanian compiled 17 standard real indicators which are strongly correlated with GDP growth. He tested this hypothesis and found out that 16 out of 17 indicators are positively correlated in the pre-2011 period but post-2011, 11 out of 17 indicators negatively correlated with the GDP growth. Also, growth in exports was 14.5% before 2011 but declines to 3.4% after 2011. Similarly, growth in imports was 15.6% before 2011 but declines to 2.5% after 2011. But GDP has only declined by 0.6%. Such a staggering decline is incompatible with the stable underlying GDP growth. Only petroleum consumption and electricity grew marginally faster.

  1. What is the magnitude?

In cross-sectional analysis, the fall in GDP varies from 2.5% per year (without electricity) to 3.7% per year (with electricity). Also, with panel estimation, the level of GDP is overestimated on average between 17 to 20%. According to Mr. Subramanian, if we take plausible and cross-sectional estimates, there is a growth over-estimation of 2.5% per year for the period 2011-2016. This estimate comes with a 95% confidence band of about 1%. So, results suggest that actual growth must be between 3.5 to 5.5%.

  1. Potential Cause

-Move away from volume to value-based estimate in manufacturing It is generally considered good to use value-based estimates as it captures the quality and technological changes that volume-based estimates couldn’t. But this approach is highly vulnerable to price changes, such as the oil process, which declined substantially in the post-2011 period. In the new approach, output value should be deflated by output prices and input value has to be deflated by input price to get real magnitudes. But current methodology doesn’t involve this double deflation rather it deflates both output and input value by output price. So, it artificially inflates the growth figure when oil prices decline. In the pre-2011 period, GDP estimates were estimated by volume so there was no significant impact of change in oil prices and other input prices. -Deflating Services by manufacturing deflators Consumer service volumes are deflated by relevant CPI service index but producer service volumes are deflated by WPI manufacturing, which is problematic. Post-2014, due to the fall in oil price, inflation in CPI service exceeded that for WPI manufacturing, which led to overestimation of GDP. This accounts for 20% of the total GVA. -Proxying Informal by Formal activity NIA estimates real GVP growth for the informal sector is based on and proxied by IIP. The informal sector comprises 30% of manufacturing GVA and 5% of overall GVA. It is likely overestimated the growth during major policy actions (Demonetisation and GST). Now with these overestimates of growth, there must be a major impact on the Indian Financial and Economic Policy. Also, the quality and Integrity of data must be improved to maintain the credibility of figures on the global stage.

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