By M Muneer
In 2015, India changed its GDP base year (from 2004-05 to 2011-12) and made other methodology shifts, like using more corporate sector data via MCA-21, greater reliance on formal rather than informal sector output, measuring GDP at market prices (including indirect taxes) rather than factor costs, etc. These changes introduced several problems.
Corporate bias and weak informal sector representation: Since many households, small enterprises, informal workshops, etc. do not file audited accounts, many estimates rely on proxies. The informal sector, which employs more than 80% of the workforce, is hard to measure well; shifting away from industrial production-based surveys (Index of Industrial Production, Annual Survey of Industries) in favour of corporate databases may underweight small firms.
Single deflation vs double deflation
India primarily uses a single deflator (broad price index) rather than separately adjusting input costs and output prices per sector. This matters especially when input costs rise steeply (oil, metals) but output price inflation lags; real growth may be overstated.
Weak correlation with real indicators
Arvind Subramanian’s Harvard paper showed that post-2011, growth rates began diverging from basic metrics like electricity consumption, two-wheeler sales, passenger traffic, industrial output, etc. These indicators did not support the high growth rates claimed. Subramanian estimated that growth was overestimated by over 2.5 percentage points for FY12 to FY17—turning “7% average growth” into something nearer 4.5%.
Timeliness, classification and data gap issues
Delays in surveys, misclassifications, untraceable firms in the MCA (ministry of corporate affairs) database, and infrequent updates of key data (e.g. large sample households) introduce error and uncertainty.
Given obvious weakness in investment, manufacturing, declining or flat sectors, weak private sector capex, falling export shares, etc., how do the high growth estimates persist?
Base effect and nominal growth inflation
When nominal GDP grows fast (due to inflation, indirect tax changes, subsidies, etc.), real growth gets boosted when deflators understate inflation. If input cost inflation is high, but the deflator lags, real growth appears stronger.
Consumption and government spending
Even when manufacturing or exports are weak, government spending (infrastructure, subsidies, welfare) or consumption (especially rural+services) can buoy GDP. Also schemes like tax cuts, goods and services tax (GST) changes, credit boost, rural subsidies, etc. push up consumption demand.
Revised weights & composition
As services’ share rises, digital output grows, large formal services might be easier to measure/overestimate. Formal sector gains are counted more reliably; informal sector losses may be undercounted or recognised late.
Statistical smoothing and revisions: Early GDP estimates are revised later. Sometimes revisions push numbers upward. Also, governments have incentives to highlight strong numbers, which may bias presentation (though the official defence claims the methodology is internationally accepted).
Some experts say even if large parts of industry or exports are shrinking, growth in consumption services, government outlays, technology/digital “economy” outputs, a favourable tax regime and weak inflation deflators can combine to produce 7-8% GDP growth. They also question the push for consumption as announced by the FM recently and policy moves like GST revision.
If growth is real, policy still emphasises boosting consumption for many reasons. Stimulating demand: With investment lagging, stimulating consumption keeps economic momentum. Political optics: High GDP growth sells well politically; schemes reinforcing consumption (tax rebates, stimulus, rural spending) are visible and quick wins.
Formalisation and tax revenue: Harnessing consumption via reforms (GST, digitisation, e-commerce) expands the formal tax base; helps government revenue even if the informal economy lags. Balancing external sector woes: Weak exports or shrinking manufacturing means the domestic market must pick up the slack.
GST revisions are used to support demand, reduce the tax burden, improve sentiment, and use it for election campaigns. But such steps can also reduce tax revenue and may mask underlying weakness in supply-side capacity.
To improve credibility/robustness, policymakers should embrace the best practices in developed economies. OECD nations that are in the G20 have deflated output and input separately, especially in manufacturing, to capture the changing input costs. They also do more frequent large-sample informal sector surveys, including households, businesses, and composite indexes that capture smaller firms. Such updates eliminate unwanted assumptions and biases.
The use of real-time indicators in employment, electricity usage, freight movement, digital transaction volumes, satellite data, etc. is another best practice. The question of how India can have high GDP growth despite all key indicators being negative is unavoidable when cross-validation has not been performed.
Another best practice is publishing full details that allow researchers to reproduce GDP series. Publish methodology and advance, provisional, and revised estimates clearly with explanations for revisions. And ensure GDP growth moves broadly in line with other macro indicators like industrial output, investment growth, household consumption, and exports. Further scrutiny is done when divergence is seen, and opposition’s criticism is not ignored.
Most of these countries (Canada, Australia, the UK, etc.) have independent statistical bodies that resist political pressure. Their mandates include accuracy, transparency, and periodic audits. Institutional integrity must be preserved at all costs.
India’s GDP growth numbers since the base year shift may be more “solid” than “spectacular” once you adjust for measurement biases. The inflation of real growth by 2-3 percentage points, under-captured informal sector shrinkage, weak correlation with empirical indicators, and generous estimates in services suggest the headline numbers must be viewed with caution.
India is growing but is it in ways that generate jobs, reduce inequality, strengthen manufacturing, and improve living standards? If growth is consumption-led, informal, or propped up by government spending, its durability is in question, and Viksit Bharat will remain a propaganda.
India must do the following quickly to restore trust: Improve informal sector measurement via frequent surveys, digitisation, etc.; adopt double-deflation or make deflator choices more transparent; publish and communicate revisions clearly; use real-time indicators for decision-making, not just GDP projections; ensure statistical agencies’ independence.
After all, as Mark Twain quipped, “Facts are stubborn, but statistics are pliable.” The real test for India is if it wants its GDP to remain pliable propaganda, or a stubborn truth that builds its Viksit Bharat dream.
M Muneer is a Fortune-500 advisor, start-up investor, and co-founder, Medici Institute for Innovation
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