economic-survey-vol-1-chapter-10-is-indias-gdp-growth-rate-overstated

The chapter carefully examines the evidence, leveraging existing scholarly literature and econometric methods to study whether India’s GDP growth is higher than it would have been had its estimation methodology not been revised in 2011. The aim of the chapter is to estimate the inaccuracy, if any, in the GDP growth rate using the difference-in-difference methodology.

The analysis in the chapter clearly shows that the evidence in favor of an overstated Indian GDP disappears completely in a correctly specified econometric model. Arguments made by Survey to counter the claims of overstated GDP growth rate;

  • India’s improvement in indicators such as access to nutrition and electricity might explain the higher growth rate in Indian GDP post the methodological change.
  • Higher pace of creation of firms: 10 percent increase in new firm creation increased district-level GDP growth by 1.8 percent. 
    • As the pace of new firm creation in the formal sector accelerated significantly more after 2014, it has created the resultant impact on district-level growth.
  • Comparing the Indian GDP growth rates to those of other countries
    • Using a cross-country, generalized difference-in-difference model with fixed effects, the analysis demonstrates the lack of any concrete evidence in favor of a misestimated Indian GDP.
    • The difference in average growth rates represents important structural differences among countries that must be held fixed before it can examine the effect of treatment.
    • The models that incorrectly over-estimate GDP growth by 2.7 percent for India post-2011 also misestimate GDP growth over the same time period for 51 other countries out of 95 countries in the sample. 

Why is it difficult to compare India with other countries?

  • India has very high informal sector employment and a large proportion of youth that are not in employment, education or training.
  • Agriculture contributes disproportionately to India’s employment whereas services contribute disproportionately to GDP.
  • Complex relations of variables in GDP estimation methodology
  • The relationship between these indicators and GDP is preserved even after the methodology revision, thereby adding to the evidence that the revised methodology estimates the GDP correctly

Change in the Base Year of the GDP Series  

  • The Base Year of the GDP Series was revised from 2004-05 to 2011-12 and 
  • It was released on 30 January 2015 after adaptation of the sources and methods in line with the System of National Accounts (SNA) 2008 of the United Nations.

About the System of National Accounts (SNA)

  • For the purpose of global standardization and comparability, countries follow the SNA evolved in the UN after elaborate consultation. 
  • The SNA 2008 is the latest version of the international statistical standard for the national accounts, adopted by the United Nations Statistical Commission (UNSC) in 2009.

Survey points out that the correlations between these indicators and GDP growth have flipped signs in the past even when there were no methodology revisions.

Way ahead

  • GDP growth is a critical variable for decision-making by investors as well as policymakers. Therefore, the recent debate about whether India’s GDP is correctly estimated following the revision in estimation methodology in 2011 is extremely significant.
  • The survey highlighted the need to invest in ramping up India’s statistical infrastructure is undoubted. It also said that India has made impressive improvements in several social development indicators.

Also readSummary Of Economic Survey 2019-20 Volume 1

Growth Rebounding To 6% - Economic Survey