All kinds of interpretations and conspiracy theories are floating around regarding the CSO release of the new GDP back-series for the period FY05 to FY12.
All kinds of interpretations and conspiracy theories are floating around regarding the CSO release of the new GDP back-series for the period FY05 to FY12. At the outset, let me state that I, along with others, also found it inappropriate for NITI Aayog to be directly involved in the presentation of statistical data by the CSO. The question all of us need to address is whether the back-series makes economic sense, and hence, whether it can be “interpreted” as an accurate reflection of reality. I have written several articles over the last three years on the new GDP data—the basic conclusion has been that the new series (base 2011-12) has been vetted by statistical experts at the international agencies involved in this worldwide exercise, e.g., the UN, IMF and the World Bank. My conclusion has been that the unprecedented discussion about the “accuracy” of the new GDP data (now in its fourth year) is entirely political and would not have happened if the Congress party had not suffered a crushing electoral defeat in 2014.
The new GDP series was presented in end January 2015 barely seven months after the defeat of the Congress. The debate that has followed is unique to India, and the world. GDP changes to a new series are routine, and has occurred at least six times in India and never before with any discussion, let alone debate. Base year changes occurred in 1960-61, 1970-71, 1980-81, 1993-94, 1999-00, 2004-05, and now 2011-12. I challenge anyone, and everyone, to show me one instance of any discussion on base-year change in India, or elsewhere. Why did it happen in India, and post 2014? If you have a better explanation than politics, I am ready to listen.
I will now get into some technical details (documentation of evidence) which strongly indicates that the lowering of GDP growth for FY05 to FY12 was entirely to be expected. And expected primarily because of the surprise low employment growth between FY05 and FY12. Let me explain.
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The story behind the new GDP series, and the just released CSO back series, has its (major) explanation within the realm of NSSO employment data for the last 20-odd years. There is one large sector of the economy—wholesale and retail trade (WRT)—whose GDP estimation is directly dependent on employment data as revealed by NSSO employment data. This sector, in the old 2004-05 series, accounted for 16% of GDP; in the new 2011-12 series, it accounts for only 11%. Why this large decline in the share of this sector?
Let us look at the traditional method of estimating WRT GDP. On the release of the NSSO employment data (approximately every five years), the CSO looked at employment gains of this sector and assuming some productivity growth of the labour arrived at an estimate of sectors GDP. In 1999-2000, there were 34.4 million people working in WRT, and this figure increased to 41.7 million in FY05, yielding an annual growth rate in employment of 3.9% per annum. Total employment in the economy increased at a CAGR of 2.4% per annum (from 371 million in 1999-2000 to 419 million in FY12). GDP growth for this period: 5.5% per annum, implying an average productivity growth of 2.1% per annum.
This healthy growth in employment was assumed by the CSO in making estimates until the next major NSSO survey, in FY12, became available. [There was a drought-infected NSSO survey for FY10 which was rightfully ignored by the CSO]. However, the results of the FY12 NSSO survey were a shocker for employment gains, and in “polite” circles, the jobless growth encountered during these years is not much discussed. For the seven-year period FY05 to FY12, NSSO data revealed a total job gain of only 9 million (from 419 million to 428 million). Nine million over seven years translates into a CAGR of only 0.3% per annum. GDP growth for this period: 8.1% per annum implying an average productivity growth of 7.8% per annum. Some acceleration in labour productivity growth was to be expected given the large increase in investment—but 7.8% per annum?
This was the first very broad hint for all concerned that there was some overstatement in the GDP series for the (UPA) period, FY05 to FY12. For WRT, the growth in employment was even lower than the aggregate—only 0.2% per annum. The CSO (and international advisers) rightly got down to the task of changing the method of estimating GDP for the WRT sector. They rightly converged on using growth in real sales tax revenue as an indicator of GDP in wholesale and retail trade.
How much difference does the new, and improved, method make for estimation of GDP growth? For starters, it decreases the share of WRT in GDP by about 5 ppt (from 16% to 11%). This is a natural consequence of the fact that the share was grossly over-estimated according to the incorrect estimate of high growth in WRT employment. This large decline in the share can only mean that growth in the WRT sector was significantly lower than growth in the non-WRT sector. One estimate of the decline in aggregate growth, because of a change in method of WRT computation, is about 50 bp a year.
The new CSO back series projects GDP growth to be 6.6% per annum between FY05 and FY12, versus the 8.1% contained in the old GDP series—i.e., about 150 bps per year lower average growth.
Inflation (as measured by the GDP deflator) between FY05 and FY12 has also been corrected in the new back series. The deflator is a weighted combination of the WPI and CPI inflation indices. The two increased at a CAGR rate of 6.4% and 7.9%, respectively, between FY05 and FY12; however, the old GDP deflator has an average inflation rate of only 6.7%. A mid-point of the CPI and WPI inflation yields 7.2%, i.e., GDP deflator was underestimated by around 50 bps in the old series.
Just these two simple and broad back-of-the-envelope computations suggest that any back series for the earlier than 2011-12 should lower GDP growth, not raise it. Incorporating employment growth estimate for just 10% of the labour force, and an under-estimation of inflation, the GDP back series lowers GDP growth in the 2005-2012 period by around 100 bps per year. The CSO estimate, incorporating all factors, is for a decline of 150 bps per year. It is a very credible estimate; but don’t tell that to the politicians and maybe some economic experts as well!
(Contributing editor, The Financial Express
Views are personal. Twitter: @surjitbhalla)