India’s GDP Dilemma

Prasanth Aby Thomas
Published: April 2016

gdp

The Government’s recent report that GDP had grown much faster than estimated has sparked confusion and criticism

Let’s face it, we are obsessed with GDP figures when it comes to talking about a country’s development. Every now and then government reports, analysts and financial institutions scramble to come out with current and prospective GDP figures, with often ambiguous and incomprehensible reasons for the same. And if that were not enough, governments and private financial institutions often engage in a tussle of words on whose predictions would be more accurate.

India has seen more of this of late, after the country’s economy moved more into the spotlight as an emerging market. The Indian government is well aware of how sensitive a topic this is and has made sure that it projects strong GDP figures for the future. To the current administration that took office with promises of boosting economic development, there is an extra responsibility to make things look pretty.

The traditional picture in this regard is rather dull. Most international financial agencies do not expect India’s financial situation to improve much any time soon, not just because the domestic situation has a long way to go before things pick up, but also because the global economic climate is increasingly bleak. The projected figure with a general consensus was about 5 percent growth, similar to the previous year. But all these conventionalities were broken, and analysts and experts were thrown off guard when the government recently came up with a new report. The growth rate was not actually 5 percent in 2014, but a fantastical 6.9 percent. The difference came after the government decided to change the way it calculated GDP.

Countries tweaking and updating macroeconomic data is not something new. In fact, the International Monetary Fund is all for updating the base year for calculating GDP every five years. For the uninitiated, GDP is calculated at the market price of a specific year to avoid effects of inflation.

economic-qCountries like Turkey and Nigeria had recently reported dramatic changes to their economic figures after making tweaks, but these were looked at with as much skepticism as in India’s case, mainly because in the case of other countries international financial agencies were in check with the changes. To be fair to the official analysts, India had completed five years since changing the base year and a tweak was due. There are also significant challenges to accurately calculating the country’s GDP since, a major portion of the total output is from individuals and small enterprises whose earnings go unrecorded and untaxed.

But such a humungous difference has baffled both domestic and foreign analysts who are not able to find other data to back the numbers up. Chetan Ahya, Chief Asia Economist at Morgan Stanley, points out that “When they generate such a ridiculous outcome, they need to go back and find out what could potentially be wrong in the data set”, according to the Wall Street Journal.

Unfortunately, the whole matter seems to have gone without a debate, and not many analysts have come up to speak about the matter. Perhaps it’s because of our obsession with higher GDP or the fact that the new figures make India look better off than China, who is touted as India’s biggest economic rival at the moment.

But it would be a joke to say that everyone have taken these numbers just like that, especially since a lot of economists have made staunch claims that India’s economy has been growing at a remarkably slow rate in the recent past. Now these experts will have to reconsider their calculations and make room to consider the government’s numbers.

Perhaps the irony of the whole situation can be seen up in the Reserve Bank of India Governor Raghuram Rajan’s reaction. “We do need to spend more time in understanding the GDP numbers,” Rajan said on February 3 after releasing the bi-monthly monetary policy of the central bank that retained the forecast of 5.5 per cent GDP (based on old method) growth in 2014-15.

“We will be watching the February 9 release with great care and dwell deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers.”

Responding to Rajan’s comments, Bloomberg TV’s Hong Kong-based anchor Angie Lau tweeted “If Rajan can’t figure this out, how can the rest of us,” reiterating the confusion that the new data has created among analysts and the financial media.

At the time this article is being written, the Modi government is going into its first full budget session, where it is expected to provide growth estimates. In all likelihood the government will reiterate its stand on the change in calculation method being in line with normal standards, but that will not stop the debate.

More importantly, questions on the matter are going to further diminish India’s credibility and foreign companies are more likely to skip the figures as a true indicator of the conditions here. What the government has to do here is to make clear how it was able to reach a difference in the growth rate and ensure that all other data add up, leaving no room for confusion.