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The Big Picture – Raghuram Rajan’s red flag on GDP

The Big Picture – Raghuram Rajan’s red flag on GDP



RBI governor Raghuram Rajan recently said that there are problems with the way we count GDP and that is why we need to be careful while talking about the real growth. Rajan’s remarks indicate the continuing suspicion among key policymakers about the veracity of the new GDP estimates that were launched in February 2015. The new estimates pegged the GDP significantly higher than previous estimates. Moreover, this jump was not in line with other parameters of economic activity.


About the New GDP Series:

New GDP series are improved versions of the old series and are on the international lines. However, according to experts, even the new series doesn’t capture the actual state of affairs.

Following are the two changes that were made-

  1. Change in base year: The government changed the base year for estimating GDP from 2004-05 to 2011-12. This, however, is done routinely after every five years or so to keep the numbers contemporary and incorporate the changing structure of the economy.
  2. Shift from factor-cost-based method to market-cost-based method: India’s GDP is now measured by using gross value added (GVA) at market price, rather than factor cost. Simply put, the new formula takes into account market prices paid by consumers. It is calculated by adding GDP at factor price and indirect taxes (minus subsidies). Earlier, domestic GDP was calculated at factor or basic cost, which took into account prices of products received by producers.


Significance of the new series:

The new GDP series is seen as a measure to better understand economic growth and prosperity. The new estimation methodology is in line with global norms where increased value addition, as against an actual increase in quantity of production, leads to a higher GDP.


Problems with this approach:

This approach can work seamlessly in an economy where all value addition is tracked formally and recorded in well-codified data.

  • But for a country like India, where 93% of labour works in the informal sector and where there is no credible data on employment, this method requires a more nuanced appreciation.


What’s the matter now?

It all started when advance estimates of GDP for 2014-15, released in February last year, projected India’s growth during the year at 7.4%. Changing the base year to 2011-12 from 2004-05 in January, the CSO said that India’s real GDP, that is adjusted for inflation, grew 6.9% in 2013-14 instead of the earlier projected 4.7%, and by 5.1% in the year before compared to 4.5%.

  • The new numbers seemed contradictory when compared with other economic indicators such as revenue growth of listed firms, expansion of banks, the index of industrial production numbers as well as real challenges confronting India Inc. such as weak demand, high debt and low earnings.
  • Critics pointed to the new methodology showing that manufacturing grew at 5.3% in 2013-14 compared to 0.7%, which, they maintained, was hard to reconcile with the ground level reality.



Indian data have always been somewhat flawed, but they have also been within the realm of the believable. The new series for GDP may also be flawed, but it is not fudged for short-term ends. Yet, silence from the government on questions about the statistics helps create that impression.

  • It is not that the new GDP series is totally off; simple examination of the nominal GDP growth figures would suggest an economy slowing down consistently. Nominal annualised growth of 6% in the second quarter of 2015-16 was the lowest since 2011, when the new series started. In fact, nominal growth in the last four quarters is almost half of what it was before this government took office.
  • Moreover, the latest figures show a nominal growth rate lower than the real growth rate, due to a negative GDP deflator; this has not occurred for a long time.


Way ahead:

It is only when the GDP figures are corrected for inflation that real GDP growth appears to be healthy and stable. This is not a data problem – simply that business perceptions are formed on the basis of their revenue and earnings reported in nominal rupee values, whereas it is inflation-adjusted figures that are favoured by policymakers.


What can the government do now?

Now, the government needs to hammer out a threefold message-

  • First, that there may be other things that may be wrong with the new GDP series, but these will be identified and corrected.
  • Second, that India is moving closer and closer to global best practices on national accounting.
  • And third, that the new GDP series does reflect what is happening in the Indian economy.

In the absence of such messaging, questions will arise – when government data do not seem in sync with experience, doubt is natural. Silence will only lead to distrust and appear as if the government is either unsure of, or sugar-coating, its own figures. It is also time for people to demand more economic data from the government in order to be able to see the true state of the economy.