China has done very well despite the widespread perception its GDP numbers are very dodgy
Who would have thought that Rene Descartes, the French philosopher and mathematician best known for the aphorism, ‘Cogito, ergo sum’ -- Latin for ‘I think, therefore I am’ -- would be a weapon used almost four hundred years after his death by economists in India’s GDP wars.
It started with Arvind Subramanian, the former chief economic advisor to the Indian government, writing that a Descartes of today would say, ‘As we measure, so we are,’ a very poor and distant cousin of the far grander, ‘I think, therefore I am.’ Starting his paper with that nod to Descartes, Subramanian went on to cast horrendous doubts on India’s GDP growth numbers and its cherished claim of being the fastest-growing major economy. He said India’s real GDP growth was over-estimated by around 2.5 percentage points annually between 2011-12 and 2016-17, under the new series. According to him, our proud 7 percent growth was actually a tame 4.5 percent.
As TS Eliot told us, ‘After such knowledge, what forgiveness?’ India’s GDP estimates have been questioned ever since the new series came out, but this apostasy from someone who till recently was one of their very own must have hurt badly. It was unlikely that the establishment would let it go with a pained, ‘Et tu, Arvind?’
The Prime Minister’s Economic Advisory Council (PM-EAC) has quickly responded with a detailed riposte to Subramanian’s claims. What’s more, they started their paper with a Descartes quote of their own. ‘We can quote Descartes better than you,’ seems to be the thinking.
This is what they have quoted: ‘“Resolving to seek no knowledge other than that of which could be found in myself or else in the great book of the world, I spent the rest of my youth traveling, visiting courts and armies, mixing with people of diverse temperaments and ranks, gathering various experiences, testing myself in the situations which fortune offered me, and at all times reflecting upon whatever came my way so as to derive some profit from it.”
Having quoted the great man, however, they seem determined not to derive any profit at all from the Subramanian paper. Here’s a broadside they aim at it: ‘his paper lacks rigor in terms of specific data sources and description; alternative hypothesis; rationale of equation specifications, use of dummies, and robustness-check diagnostics of estimated equations; and choice of countries in the sample and a specific list; it would not stand the scrutiny of academic or policy research standards.’ And this is where they go sardonic: ‘The author’s logic of not using tax data appears to be a convenient argument meant to avoid inconvenient conclusions based on hard facts’. Ouch, that hurt. Here’s where he’s accused of bias: ‘blind trust in a private agency (CMIE) and blind distrust in a government institution that has served India (CSO) appears unwarranted for a neutral academic.’ And the conclusion is ‘the estimation process is robust to spurious criticism’ -- implying of course that Subramanian’s critique is spurious. These examples suggest that this is not just an academic discussion, but something much bigger and possibly hairier is at stake.
How does the PM-EAC paper rebut the Subramanian paper? They do so by firstly questioning his methods -- the paper is not peer-reviewed; he has cherry picked his data; it is ‘conceptually incorrect to relate levels of GDP to levels of indicators’; and this particularly nice one: ‘An unusual econometric exercise with unworthy results.’
Secondly, they give alternative explanations to the facts pointed out by Subramanian. For example, the Economic Advisory Council paper says, ‘A weaker correlation between a select few indicators and GDP growth would not necessarily signal an economic slowdown; but only that the contributors to growth changed significantly post global financial crisis.’ Here’s another one: ‘The fact that India is an outlier cannot automatically lead to the inference that India’s growth has been over-estimated, simply because the drivers of India’s growth may have changed’. And this little gem: ‘In a rapidly changing economy like India, something counter-intuitive can’t be a reason for national alarm. Relationships between indicators and GDP have changed many times in the past, and this is nothing to be excited/saddened about.’ They also approvingly quote others who have attempted to debunk Subramanian’s claims.
Doth the Economic Advisory Council protest too much? Not really…this back and forth, this thrust and parry is all to for the greater good and other economists will no doubt weigh in, contributing to the discussion and hopefully to enlightenment. But are the Economic Advisory Council’s alternative explanations the right ones? Or are they conjectures, at best educated guesses? Subramanian had said in his paper that ‘Given the nature of the data, and the impossibility for researchers to reproduce the detailed methodology underlying the GDP estimates, the results in the paper are by no means the final word. Further research, building on the results in the paper—which itself builds on preliminary work done in the Economic Survey—will surely uncover further insights.’ Towards that end, he had recommended ‘the entire methodology and implementation for GDP estimation must be revisited by an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature.’ Official circles in India are unlikely to be interested in following Subramanian’s advice.
That said, let’s not over-estimate the importance of the GDP growth numbers. Even the most rigorous of them can at most be just one tentative input in a policy-maker or investor’s decision process. They are after all backward-looking indicators. It would, for example, be a gross underestimation of the intelligence of the wise people on the Monetary Policy Council or indeed the finance minister to assume they rely on GDP figures alone.
Consider China, whose GDP numbers are widely seen as notoriously dodgy. Some economists have said its growth rate is half the official estimate. Yet that hasn’t prevented huge amounts of investments from pouring into the country. When there are doubts about the GDP numbers, alternative measures will be used. Even the Chinese Premier, acknowledging the unreliable GDP estimates produced by his own government, said he looked at other indicators to gauge the health of the economy. Those indicators have since been compiled into an index named after him, the Li Keqiang index. It’s worth noting that an Indian brokerage has constructed a Keqiang index for India.It would perhaps be appropriate to end by inflicting another Rene Descartes quote, a much better one: ‘If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things.’