GDP shocker from former CEA Arvind Subramanian cannot be dismissed lightly
Arvind Subramanian’s assertions cannot be dismissed lightly for the simple reason that he was CEA from Oct 2014 to June 2018. He had access to facts and figures and his job was to study them closely
It is known as the Duck Test. It goes like this: “If it looks like a duck, quacks like a duck, walks like a duck, then it must be a duck”.
Applying the same common sense logic to the Indian economy, it was clear that it looked like a slowdown, felt like a slowdown, and therefore must be a slowdown. No jobs, no investments, no building activity, no export growth – these are the textbook symptoms of a lethargic economy; not the kind of high-energy animal spirits that a booming economy should be exhibiting.
No, said the Government. Forget the Duck Test. Forget the quacking of the angry farmers, the jobless youth and the corporate losers. Just look at GDP statistics - seven percent, eight percent, by 2022 it will be ten percent, India will soon be a five trillion dollar economy. India is the fastest growing economy in the world. Those whose hearts are not swelling with pride are anti-national, anti-Modi or both.
All doubts were effectively put to rest. The critics were silenced. The Opposition parties were trounced in the elections. The newly re-elected government is all set to unveil a 100-day plan, a 1000-day plan and even a plan to celebrate the 100th anniversary of India’s Independence in 2047.
Suddenly, like a bolt from the blue, the former Chief Economic Advisor has come out with a shocking claim that is bound to burst the government’s bubble or at least compel it to come out with convincing counters to some awkward questions.
The GDP is not 7 percent, says Arvind Subramanian. It has never been that high in the last eight years. India’s current GDP is probably only 4.5 percent. All the tall claims since 2011 were just figures being fudged by cleverly changing the basis of calculation.
Arvind Subramanian has prepared a research paper which has been published by Harvard University. His assertions cannot be dismissed as lightly as any similar claims by other independent economists or by Opposition party leaders, for the simple reason that he was CEA for four years from October 2014 right until exactly a year ago, June 2018. He ought to know. He had access to facts and figures from the inside and his whole-time job was to study them closely.
Moreover, he has in his Harvard paper applied an expanded version of the duck Test. His analysis is based on 17 key economic indicators that are directly correlated with the GDP growth. He doubts the veracity of the official GDP numbers. He provides detailed data and reasoning for his conclusion that over seven per cent growth is an illusion and 4.5 per cent is closer to the reality.
It is a major embarrassment for the Modi government. But more than just a temporary mortification - it will change the entire economic game-plan if it turns out to be accurate.
For instance, regarding the manufacturing sector, the former CEA asserts that the output figures were highly over-estimated and greatly mis-measured. A part of the fudge was due to the change in methodology. Earlier the manufacturing value that was added in the national accounts used to be closely correlated to IIP and manufacturing exports. That link has been broken. In his colourful words: “The Indian policy automobile has been navigated with a faulty, possibly broken, speedometer”.
The credibility of Arvind Subramanian’s estimates is enhanced by the fact that he has taken a eight year span that does not only relate to the Modi regime’s first five years in office but includes the last three years of UPA rule.
The data he says flies in the face of common sense. It fails the Duck Test. How could jobs, for instance, be growing at the pace the government claimed if private consumption expenditure growth was slowing so fast? And how could GDP growth in NDA-2 average 7.7% as compared to UPA-2’s 6.7% if bank credit grew at roughly half the pace (8.6% in NDA-2 vs 16.3% in UPA-2) and investment levels also fell to around 29% of GDP from around 33.2% in the same period?
For the Modi government, there is little point in seeking consolation in references to UPA. It is faced with the major challenge of restoring faith in India’s statistical system. And to fix it. If the data is faulty, how can any government or the RBI even conduct policy? If the government knew that, as Subramanian says, growth was doing so badly, why did it not rectify the situation?
As Congress national secretary Madhu Goud Yaskhi was quick to ask: If India's GDP is a mis-estimation, what are the magnitudes and implications?
For the common man, the sad truth is that the Duck Test reveals the reality. The economy isn't galloping on the fast track. It is limping along and gasping for breath. It needs to be admitted to the ICU and put back on the rails. Otherwise the five trillion dollar dream will be a dead duck.