GDP estimation: System not perfect, but it’s better than one based on annual surveys

The working paper mentions the National Statistical Commission (NSC). The seeds of NSC were sown by the C. Rangarajan Commission in September 2001. Many people may have forgotten what this report said.

What happened in January 2015 was more than a base year change from 2004-05 to 2011-12. There was a switch from GDP at factor cost to GVA
What happened in January 2015 was more than a base year change from 2004-05 to 2011-12. There was a switch from GDP at factor cost to GVA

We owe a lot to Rene Descartes, not just the clichéd quote, translated in English as “I think, therefore I am.” Arvind Subramanian, the former Chief Economic Adviser (CEA), has just (June 2019) authored a paper all of us should read and discuss. It is titled, “India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications”. It is a CID (Centre for International Development) Working Paper. A working paper means it is work in progress. In fairness to Arvind, he does say, “This paper should be seen as the beginning of a research agenda focusing on India’s National Income Accounts estimates.” However, having thrown in that caveat in the main body of the paper, he makes the conclusions robust and subject to “caveat emptor”. After all, how many people read the main body? They read the abstract and the conclusions. That’s where the headlines are. Hence, “A variety of evidence suggests that the methodology changes introduced for the post-2011 GDP estimates led to an over-estimation of GDP growth.” Who said real annual average GDP growth between 2011-12 and 2016-17 was 7%? It was 4.5%. I veered away from Descartes. The paper begins with a paraphrasing of the clichéd Descartes quote. “A Descartes of today’s data-addled era might well say, “As we measure, so we are.””

That clichéd quote is from the semi-autobiographical “Discourse on the Method”. I myself prefer a different quote from the same text, less hackneyed. “Resolving to seek no knowledge other than that of which could be found in myself or else in the great book of the world, I spent the rest of my youth traveling, visiting courts and armies, mixing with people of diverse temperaments and ranks, gathering various experiences, testing myself in the situations which fortune offered me, and at all times reflecting upon whatever came my way so as to derive some profit from it.” But let’s get back to the working paper. Why 2011-12? Let’s quote Arvind Subramanian on this first. “In India, methodological changes were introduced as part of the periodic base revisions to estimating the National Income Accounts (NIA) by using the Ministry of Corporate Affairs’ (MCA) financial accounts for hundreds of thousands of companies. This effort was desirable in principle, both to expand the data that went into the NIA estimates and to move from predominantly volume-based estimates of gross value added (GVA) to value-based estimates that potentially better capture the quality and technology changes of a modern, dynamic economy….The change in GDP estimation methodology was initiated by—and most of the technical work done under—the UPA-2 government, as part of the changes that routinely occur with base revisions to GDP estimates. They were completed by the statisticians and technocrats in late 2014, a few months after the NDA-2 government came into power.”

Nothing wrong with this statement, except the 2015 shift was more than routine. Base changes are routine and have been done in 1967, 1978, 1988, 1999, 2006, 2010 and January 2015. What happened in January 2015 was more than a base year change from 2004-05 to 2011-12. There was a switch from GDP at factor cost to GVA, with GDP at market prices now derived from GVA. In June 2015, there was a long methodological note by Ministry of Statistics and Programme Implementation (MOSPI) explaining what had been done and why. I don’t think anyone has complained about change in the base year. I don’t think anyone has complained about implementing recommendations of the 2008 system of national accounts (SNA) either, which brings India, to the extent possible, in conformity with international practice.

January 2015 became more than routine because of something else. Let me quote from the methodological note. “In the new series, comprehensive coverage of Corporate Sector has been ensured in mining, manufacturing and services by incorporation of annual accounts of companies as filed with the Ministry of Corporate Affairs (MCA) under their e-governance initiative, MCA-21. Accounts of about 5 lakh companies have been analysed and incorporated for the years 2011-12 and 2012-13, while the number of common companies (companies for which accounts are available for the year 2012-13) is around 3 lakh for the year 2013-14.”

Lest we forget, there was an Advisory Committee on national accounts statistics, chaired by K Sundaram. This had five sub-committees—unorganised manufacturing and services, chaired by K Sundaram; agriculture and allied sectors, chaired by S Mahendra Dev; private corporate sector, chaired by BN Goldar; national accounts, chaired by AC Kulshreshtha; and private final consumption expenditure, chaired by AK Adhikari. In this age of mass media and social media, everyone is an expert on everything. In spite of having been trained as an economist and despite having studied national income accounting, I don’t regard myself as an expert on the subject. Towards the end of his paper, Arvind Subramanian writes, “If statistics are sacred enough to require insulation from political pressures, they are perhaps also too important to be left to the statisticians alone.” Perhaps, each to his own. So far as I am concerned, each of the gentlemen named (there is no lady) knows more about the indicated subject than I do. They recommended the switch, including use of MCA-21. Just so we are clear, this is about GDP/GVA in nominal terms. It is not about GDP deflators and deriving real GDP, and its growth, from the nominal. It is not about the back-series, it is not about employment numbers. The working paper does tend to bung everything in. However, that just muddies waters. Let’s take issues in bits and pieces. Notice that work towards the January 2015 switch had been started in 2008 and perhaps “all”, not just “most” of the technical work had been done before the May 2014 election results. This dead horse needs to be laid to rest, since it doesn’t stay dead, but keeps getting up.

The working paper mentions the National Statistical Commission (NSC). The seeds of NSC were sown by the C. Rangarajan Commission in September 2001. Many people may have forgotten what this report said. “The credibility of NAS (national account statistics) has been often questioned by users in the 1990s because of the large differences (in absolute magnitude as well as in terms of growth rates) in sectoral or aggregate estimates in different stages of revisions arising from delays or major revisions undertaken by the source agencies….However, for the compilation of NAS, information available from the ASI has to be updated keeping in view the non-response factor….The information on non-responding units can be said to be an area of data gap for the registered manufacturing sector as it is not known whether the non-responding units were functioning normally or were closed.” Was the earlier system, based largely on ASI (Annual Survey of Industries) for manufacturing (registered and unregistered), perfect? No, it wasn’t. Is the MCA-based system perfect? No, it isn’t. Despite problems with MCA, is the MCA-based system superior to the ASI-based one? The consensus (I didn’t use the word unanimity) among experts seems to be that it is. What do MCA-based problems do to GDP measurement and growth? The working paper says, “Recently, Pramit Bhattacharya (2019) documented problems in the MCA data used in the construction of the GDP estimates under the new methodology. Serious as these are, it has not been clear if these problems lead to systematic mis-estimation of GDP levels and/or growth rates, as Pronab Sen, the former Chairman of the National Statistical Commission has argued.” Another dead horse thrashing around.

The author is Chairman of the Economic Advisory Council to the PM. (Views are personal)

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