HYDERABAD : Chief Economic Advisor K V Subramanian on Wednesday shot down his predecessor’s economic evidence on GDP overestimation as incorrect, implying that it was all sound and fury, signifying nothing.Rather, he advised doubters to refer to “high-school arithmetic”, where the original fraction doesn’t change simply due to a different numerator or denominator.
“Growth rate is a fraction. Why? When you calculate growth rate, you take GDP (Gross Domestic Product) this year, divide it by GDP last year and subtract 1 to get the growth rate. So even if, let’s say, GDP values were overestimated or underestimated in both the years, doesn’t necessarily imply a difference in the growth rate,” he explained.
Recently, former CEA Arvind Subramanian’s paper showed overstatement of GDP growth by 2.5 per cent, inciting two types of opinion mobs. As economists took positions in favour and against, several articles were written. The latest dispatch came from the University of Michigan, which refuted claims of any overestimation.
Citing the study, Subramanian came down heavily on his predecessor’s research saying the “inference made by those experts (read Arvind Subramanian) was wrong” as it ignored statistical validations and techniques needed to draw an inference.“One can do correlation of GDP growth with what you call these high frequency indicators. Now, those who learned statistics will acknowledge that correlation by definition changes a lot over time.
What the technical term they should use is correlations are non-stationary, which means they keep changing. Even if there was absolutely no change in the GDP methodology, you would still find ... changes in these correlations. So, you cannot infer that ... because there’s a change in the correlation, that the GDP methodology is incorrect and that GDP numbers are wrong,” he elaborated.
Turning philosophical, he further said that in a democracy like India, it was hard to maintain a narrative farther from the truth and if indeed there was inaccuracy, the incentive to muddy up numbers was when growth was slower. “So, either we actually have a slowdown or our GDP numbers are accurate,” he reasoned.
Addressing a public discourse forum organised by Manthan here, Subramanian said in order to achieve the goal of $5 trillion, the country needs to focus on investments, as it’s the key driver of economic development in an economy like India where consumption is a force multiplier.
Growth rate is a fraction. Why? When you calculate growth rate, you take GDP this year, divide it by GDP last year and subtract 1 to get the growth rate. So even if, let’s say, GDP values were overestimated or underestimated in both the years, doesn’t necessarily imply a difference in the growth rate
KV Subramanian, Chief Economic Advisor