Concerns about GDP measurement

INDIA - Report 12 Jun 2019 by Ila Patnaik

​The previous "Chief Economic Advisor" to the Ministry of Finance, Arvind Subramaniam (who now lives in the US), has released a paper suggesting that GDP growth was overstated from 2011 to 2017. We have long known that the methodology change, which came into effect for the series starting from 2011-12, yielded a sharply divergent picture when compared with trusted estimates of firm performance and employment. As a consequence, we have emphasized forming a picture of the economy without using GDP data. Over the years, we have devoted considerable effort towards research on measurement aimed at reducing and ideally eliminating the use of GDP data in our analysis.

While the raw growth rate is important, it is equally important to have a sense of business cycle conditions. We have built a framework for estimating the state of the business cycle that does not use the official GDP data in any fashion. This yields a useful estimate of the cycle. (It is possible that trend growth has also changed, although these changes take place more slowly).

Overestimation of GDP growth for multiple years adds up to overestimation of the level of GDP. This impacts upon the budget process, targets for tax collections, and borrowing by the government, among other issues. This poses quite a puzzle for policy makers in the way forward.

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