2019 – Posted in: Daily News – Tags: GDP

INDIA’S GDP GROWTH – NEW METHODOLOGY

For: Mains

Topics covered: Former CEA’s report, PM’s Economic Advisory Council’s clarifications, What is GDP

News Flash

The Prime Minister’s Economic Advisory Council (PMEAC) has released a detailed note enumerating its objections to former Chief Economic Adviser Arvind Subramanian’s paper on India’s GDP growth.

This note rejects the methodology, arguments, and conclusions in Subramanian’s paper.

Growth Domestic Paper: GDP is a broad measurement of a nation’s overall economic activity.

Subramanian’s Research Paper

Paper named as India’s GDP Mis-estimation: Likelihood, Magnitudes, Mechanisms, and Implications.
It is published by the Center for International Development at Harvard University.
Former CEA said India’s GDP growth in the period 2011-12 to 2016-17 is likely to have been over-estimated.
He also argued that GDP growth during that period was actually 4.5% rather than the 7% presented by the official data.
India changed its data sources and methodology for estimating real gross domestic product (GDP) for the period since 2011-12.
He argued that one of the problems with the new methodology for calculating GDP growth since 2011 was that the growth numbers no longer correlated with other indicators of economic growth such as electricity consumption, two-wheeler sales, airline passenger traffic, index of industrial production, and export figures, etc.
In total, Mr. Subramanian looked at 17 such indicators and found that the correlations between most indicators and GDP growth broke down in the post-2011 period.

Methodological Issues

Former Chief Statistician of India and expert on India’s GDP calculations Pronab Sen countered Mr. Subramanian’s thesis.
He said GDP growth can come from three distinct factors: One is growth in volumes, the amount that is produced. The second is growth in productivity, and the third is the improvement in product quality.
What Arvind has done is that the indicators he has used are all volume indicators, he has said they were very strongly correlated prior to 2011 but not after that period.
As per Dr.Sen, the reason for this breakdown in correlation is precise because the shift in methodology in 2011 meant that the value of goods and services were now considered to estimate growth and not their volume.
According to Dr.Sen, Post 2011, we moved to value indicators from volume indicators, the relationship is weaker because the other two drivers would start getting picked up by the values.

Prime Minister’s Economic Advisory Council

It is a non-constitutional, non-permanent and independent body.
It was set up with a view to providing a sounding board for inculcating awareness in Government on a different point of view on key economic issues.
It advises the Prime Minister on economic issues like inflation, microfinance, and industrial output.

Functions

Analyzing any issue, economic or otherwise, referred to it by the Prime Minister and advising him thereon;
Addressing issues of macroeconomic importance and presenting views thereon to the Prime Minister. This could be either be suo-moto or on a reference from the Prime Minister or anyone else;
Submitting periodic reports to the Prime Minister on macroeconomic developments and issues with implications for economic policy;
Attending to any other task as may be desired by the Prime Minister from time to time.

Source: The Hindu

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