Finance ministry defends controversial new GDP method
The finance ministry on Friday said there were “mixed signals” emanating from different data sources, but defended the new method to calculate India’s national income that has drawn criticism for overstating the economy’s size and growth.
“The methodology for compiling India’s gross domestic product (GDP) estimates conforms to international standards and deviations are made only in cases where data limitations demand otherwise,” the Mid-Year Economic Analysis tabled in Parliament said.
India will likely grow at 7-7.5% in 2015-16, slower than 8.1-8.5% estimated in February, hit by two years of back-to-back droughts and a wobbly world economy, the review, which is an official report card of sorts, said.
“The economy is recovering but it’s hard to be very definitive about the strength and breadth of the recovery for two reasons — first, the economy is sending mixed signal and second, there is some uncertainty how to interpret GDP data,” chief economic adviser Arvind Subramanian said.
In January the Central Statistics Office (CSO), using a new method, said that India’s real or “inflation adjusted” GDP in 2013-14 grew 6.9% instead of the earlier 4.7% and by 5.1% in the year before compared to 4.5% in the earlier system, stumping both experts and the non-initiated.
The mid-year review stoutly defended the institutions — the Advisory Committee on National Accounts Statistics and the National Statistical Commission — involved in constructing the new method as “fiercely independent.” “The suggestion or insinuation of motivated GDP estimates is therefore preposterous,” it said.
It, however, added that GDP estimates may be prone to “measurement uncertainty as they are in all countries.” It also said that declining nominal GDP growth and the challenges to the outlook for real GDP growth raises questions about the appropriate role of fiscal and monetary policy.
Real or inflation-adjusted GDP is calculated by subtracting the growth in actual or nominal GDP by the inflation rate or “price deflators.” So, if India’s actual GDP grew by say 10% and average inflation was 5%, the real GDP growth should be 5%.
The Mid-Year Economic Analysis hinted that there could be errors in using the appropriate prices for services. “The deflation may not be perfect but conceptually the right deflators are used,” it said. There could also be measurement errors that could creep in measuring manufacturing sector growth as also indirect tax estimates. “The data uncertainty is in fact reflected in the mixed, sometimes puzzling, signals emanating from the economy,” it said.
It said that this measurement uncertainty is not systemic or biased. “On balance, and without very detailed analysis, it is difficult to know the direction of bias in real GDP growth estimates,” it said.