GDP's many facets of truth
The changing base of comparing GDP figures has been unnecessarily controversial – instead of nit-picking, financial advisors must focus on the economy’s pace
The GDP controversy has brought out almost all facets of truth: truth, half-truths and unstated half-truths. To understand what has happened, one has to refer to slide 7 of the presentation on the revised GDP figures released by the Central Statistics Office (CSO). Until 2011-12, GDP had been calculated with reference to a base at 2004-05.
In 2011-12, this base was shifted to 2011-12. There is nothing in this that should be treated as unusual. In fact, the reference benchmark is revised periodically to a more closer period than earlier. CSO has additionally issued a note which explains the detailed reasons for all to see. Previously, even after shifting the base, the old series was diligently maintained and the GDP would be calculated on the same expired base for some more years. Since 2011, this double calculation of GDP series with two different bases was discontinued and that too on perfectly reasonable grounds.
So, we were left with two different series of GDP figures: one up to 2011-12 (with 2004-05 as its base) and from 2011 onwards (with the base as 2011-12). Now, CSO is a reputable organisation and all its GDP calculations have to be taken as gospel truth for purposes of any conversation because they are the best estimates of India's GDP. Now, all on a sudden, a decision has been taken to calculate the back series: that is, calculate GDP figures for the earlier years (2004-05 to 2011-12) on the new base. So, we have comparable data from 2004-05 until now. This was only half the truth.
But, what the CSO or responsible government officials did not do is calculate the GDP figures on the old base year for years beyond 2010-11, until now, to have a similar comparable figure from 2004 onwards. This was the unstated half-truth.
What were the findings of this revision of GDP and the process of back series calculation? Calculation of GDP on the new base shows that India's GDP in the two UPA periods were over roughly 30 per cent larger than stated until then, calculated on the 2004 base. Thus, for the controversial years, when the growth rate is supposed to have been lower than stated earlier, India's GDP was Rs 52.8 lakh crore (on old base), while calculated on the new base it was Rs 83 lakh crore. This applies for all the years from 2004-05 to 2011-12.
Take for instance in 2011-12, India's GDP was as big as Rs 87.4 lakh crore, computed on the new base, compared with only Rs 56.3 lakh crore (computed on the old base). So, for these years, UPA had presided over nearly a 30-35 per cent larger national income than they actually admitted or knew about. Now if we hit upon the idea of extending this comparison for the full fourteen year period, then what happens?
The total GDP today will shrink to around Rs 90 lakh crore (computed on the 2004-05 base) against the current year's official preliminary estimate of Rs 130 lakh crore. This is surely not on the basis of the rigorous calculation of GDP that the CSO does, but instead on seeing the relationship between the two series between 2004-05 and 2011-12. Additionally, there is an assumption that GDP figures are large aggregates and are based on some structural aspects of the economy which do not change too much in the short term.
So, today, the ruling government might just as well be ruling over a far smaller economy than they actually think (calculated on the old base). But, for all you, the growth rate in the last four years after 2014 might show a far higher trend than the official figures.
So then, you have options: you can have faster growth on a smaller size of the economy or slower growth on a much larger GDP. That is, your option is to choose between, say, a slower-growing US economy or a much faster growing Nigerian economy. Make your choice.
Now, the question is, should the finance minister of the country have made tall or short claims about the performance of the Indian economy now compared with a period coinciding with the former UPA government? Showing a lower growth in an earlier period and disparaging a former regime is surely no good strategy.
It was unnecessary. The Indian economy is today in fine fettle. Forget the statistics, look around, go to the markets, talk to people – you will be embraced by the feeling of a country moving forward. Houses are being built, consumption is rising, cars are selling, agricultural production is going up, prices are benign. The worries about external payment are none too pressing, as the oil prices are going down again.
Despite whatever the experts are saying, the economy has recovered from the shock of demonetisation and the introduction of GST. What was the need for taking credit following a half-baked strategy? The fault lies not in
the finance minister, but in those who advise him. A finance minister cannot be expected to do nit-picking over detailed statistics. He says largely what his advisers would present to him. If his advisers feed him half-truths, what option does he have to offer the full truth? Very little. IPA
(The views expressed are strictly personal)