Prof R Nagaraj was likely the first economist to raise doubts over the new methodology devised by the NDA regime to calculate growth.
Nagaraj headed a working group on the Index of Industrial Production set up by the Central Statistical Office in 2011. He now teaches at the Indira Gandhi Institute of Development Research, Mumbai, an advanced research institution established by the Reserve Bank of India.
He argued that by relying on Gross Value Added, or GVA, as against the Gross Domestic Product to calculate growth, the methodology was prone to jacking up the numbers, especially in manufacturing, to portray a rosier picture of the economy.
Nagaraj's criticism of the GVA methodology has since been echoed by many other prominent economists, including Ritika Mankar Mukherjee, economist at Ambit Capital, and Ruchir Sharma, head of emerging markets at Morgan Stanley.
On 11 February, the stock markets showed that concerns raised by Nagaraj and other economists aren't without basis - the BSE Sensex crashed by 800 points just two days after the government released seemingly optimistic growth data for the third quarter of 2015-16.
Rejecting such criticism, the Chief Statistician of India, TCA Anant Kumar, had claimed, "It's not a problem with the data. It's a problem that the analyst needs to get a lot more sophisticated."
Nagaraj isn't amused. In this conversation with Catch, he debunks Kumar's assertion and explains why the growth data put out by the government can't be trusted anymore. India, he warns, is "close to becoming like China in misreporting its growth data".
Excerpts from the conversation:
You were one of the first economists to raise concerns over the new GVA series. The controversy over revised growth estimates for 2012-13, '13-14 and '14-15 had settled down, but in this fiscal, the debate has only turned louder. Despite many indications that the economy is slowing, the GDP numbers seem to be going up. What do you think is the reason for this?
I have argued that it could be due to changes in the methodology and databases used in the revised series of the GDP.
In your articles, you have mentioned that the methodology used for calculating the manufacturing GDP in particular is incorrect. The GVA growth in manufacturing in the third quarter is unexpectedly up at 12.6%. Do you think this estimate is right?
I don't agree with these numbers. The manufacturing sector output in Q3 of 12.6% looks decidedly on the higher side, out of line with the industry-wise physical output estimates. It's also out of line with credit growth to industry.
The reason for this inflated estimate, I guess, is the use of private corporate sector data for corporate manufacturing, which accounts for 69% of our total manufacturing output. Since the corporate sector's estimates are problematic, on account of the changed methodology and the use of the Corporate Affairs Ministry's database, I suspect the manufacturing output growth number has gotten inflated.
The Chief Statistician of India has said the GVA is different from the GDP in that it captures value addition in products and not just their production. Could you lay out your objection to this explanation for higher manufacturing growth?
By "value addition in products" I guess he means that post-production activities like retailing, sale and service, branding etc. are also included. So, it includes not just the value added in factory but also all value addition up to the point of sale. But I doubt if this addition would contribute substantially to growth rates.
In the aggregate, as per the UN System of National Accounts, the GDP at Factor Cost - the concept used in the old series - is practically the same as the GVA at Basic Price - which is used in the new series. Similarly, the GDP at Market Price of the old series is almost the same as the GDP in the new series.
More important, year-on-year growth rates are identical. The differences between the two sets of concepts are essentially taxes minus subsidies.
Conceivably, in a specific sector, quarterly taxes and subsidies could make a difference. But they are unlikely to account for large jumps in growth rates noted in the new estimates that were reported this week.
Would it be correct to say that even if we settle for this new methodology of calculating the GVA, it would not reflect the true state of the economy, thereby putting doubts in the minds of investors?
Quite possibly. Just like China's official estimates.
Are you against the idea of using "value addition" as a barometer to calculate economic growth? Or are you just opposed to the way it is being calculated now?
As per textbooks, the GDP is the summation of GVA of all micro-economic units which produce goods and services in the country. The taxes paid to the government minus the subsidies received by the industry are also part of the GDP.
There is no question of anyone opposing the idea of value addition. It's the basic concept of production in economics. I have never opposed the use of the newer concepts introduced in the recent revision.
My criticism of the new GDP numbers is to do with uncritical use of newer methodologies which seem to have resulted in mis-measurement. I am open to correction if the Central Statistical Office makes its databases such as MCA-21 available for independent verification.
In case the government is forced to revise down its growth numbers now, what would be the impact on the Indian economy?
In the short run, such a revision could confuse investors. Credible GDP estimates go a long way in stabilising expectations of decision-makers in both public and private sectors. So, one should not be too concerned about the short-term effects and report the correct numbers.
China, too, has been accused of misreporting its economic data for years now, yet it has grown at a tremendous pace for over two decades. So, can we say the credibility of numbers is not really important, especially when global investors don't have many other places to invest in?
Yes, China's official statistics are widely believed to be overestimated. But private agencies have developed alternative indices of economic performance.
For instance, The Economist has created the Le Keqiang Index. It's named after the current Chinese premier, who, when he was governor of Liaoning province, had famously said that Chinese GDP numbers are man-made and, hence, unreliable. He had said that growth in bank credit, rail freight and power generation were more reliable measures of his country's economic performance.
Still, I guess reliable official statistics would surely have reduced uncertainty for private decision-makers and, thus, benefited the Chinese economy.