India Fudging GDP to Show Faster Growth Than China's?

Indian government now claims that the country's GDP grew by 6.9% in 2013-14, well above the 4.7% growth the country had announced earlier.

Based on the latest methodology,  it is claimed that the Indian economy expanded 7.5 percent year-on-year during the last quarter, higher than 7.3 percent growth recorded by China in the latest quarter, making it the fastest growing major economy in the world, according to Reuters. Is it wishful thinking to make Indian economy look better than China's?

India GDP Revisions. Source: Financial Times


The GDP revisions have surprised most of the nation's economists and raised serious questions about the credibility of government figures released after rebasing the GDP calculations to year 2011-12 from 2004-5. So what is wrong with these figures? Let's try and answer the following questions:

1. How is it possible that the accelerated GDP growth in 2013-14 occurred while the Indian central bankers were significantly jacking up interest rates by several percentage points and cutting money supply in the Indian economy?

2. Why are the revisions at odds with other important indicators such as lower industrial production and trade and tax collection figures?  For the previous fiscal year, the government’s index of industrial production showed manufacturing activity slowing by 0.8%. Exports in December shrank 3.8% in dollar terms from a year earlier.

3. How can growth accelerate amid financial constraints depressing investment in India?  Indian companies are burdened with debt and banks are reluctant to lend.

4. Why has the total GDP for 2013-14 shrunk by about Rs. 100 billion in spite of upward revision in economic growth rate? Why is India's GDP at $1.8 trillion, well short of the oft-repeated $2 trillion mark?

Questions about the veracity of India's official GDP figures are not new. These have been raised by many top economists. For example,  French economist Thomas Piketty argues in his best seller "Capital in the Twenty-First Century that the GDP growth rates of India and China are exaggerated.  Picketty writes as follows:

"Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics. This paradox-sometimes referred to as the "black hole" of growth-is obviously problematic. It may be due to the overestimation of the growth of output (there are many bureaucratic incentives for doing so), or perhaps the underestimation of income growth (household have their own flaws)), or most likely both. In particular, the missing income may be explained by the possibility that a disproportionate share of the growth in output has gone to the most highly remunerated individuals, whose incomes are not always captured in the tax data." "In the case of India, it is possible to estimate (using tax return data) that the increase in the upper centile's share of national income explains between one-quarter and one-third of the "black hole" of growth between 1990 and 2000. "


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Comments

Riaz Haq said…
Even the RBI’s Rajan is Confused by India’s New GDP Numbers

India’s statistics ministry dropped a bombshell revision of recent GDP data Friday evening, provoking some head-scratching among economists trying to make sense of the incredible (in both senses of the word) new numbers. Growth of 6.9% in the 2014 fiscal year instead of 4.7%!

Had we all been “horribly wrong” about the Indian economy? Was the previous, Congress party-led government voted out on specious premises? Were the data fudged?

On Tuesday, Raghuram Rajan kept a cooler head.

“I don’t want to say anything about the numbers until we understand them better,” the Reserve Bank of India governor told reporters after announcing his decision to hold the policy interest rate at 7.75%. He said it would be “premature to take a strong view” based on the updated data. The central bank also kept its forecast for GDP growth for the year that ends next month at 5.5%—and, notably, continued to report the forecast using the old base year.

GDP growth in a year that ended nearly 11 months ago might not be the most immediately pertinent data point for deciding today’s monetary policy. But Mr. Rajan’s hesitation about embracing the new figures at least shows that policy makers aren’t junking their old narratives about the economy until the new GDP methodology yields a more-complete picture of recent trends.

Mr. Rajan, like others, pointed to the preponderance of other data that show continued stagnation that year: falling imports, sluggish auto sales. “We find it hard to see the economy as rollicking in 2013-14,” he said.

“I am puzzled by the new GDP growth numbers,” said Arvind Subramanian, the government’s chief economic adviser, in an interview with the Business Standard newspaper. He noted that the year that ended March 2014 was a crisis year for India, the year of the “taper tantrum,” capital outflows, the roiled rupee and RBI monetary tightening.

“I am not saying these [GDP] estimates are wrong in any way, only that these bear further scrutiny,” Mr. Subramanian said.

Of course, it’s not as if the RBI could have changed its forecasts on a dime even if it had wanted to. Most industrial-grade models used for such purposes rely on quarterly data to assess the dynamics of the economy.

Rudrani Bhattacharya of the National Institute of Public Finance and Policy in New Delhi said that with only the revised 2012-13 and 2013-14 annual growth rates available so far, the best she can do is use some simplistic assumptions to generate a quick-and-dirty revised forecast: “a mere scenario analysis,” she said.

Next Monday’s data release—when we’ll get GDP for each of the last three quarters as well as an advance estimate of growth for the whole fiscal year—is still the one to watch

http://blogs.wsj.com/indiarealtime/2015/02/03/even-the-rbis-rajan-is-confused-by-indias-new-gdp-numbers/
Riaz Haq said…
From WSJ:
Much of the information about the new GDP method had already been made public in a 144-page document released last month. But who has the time? Here are some highlights.

1. In India, all cars used to be equal. In earlier Indian GDP data, the key manufacturing indicator was the monthly index of industrial production, which is based on the total quantity of output in a sample of a few thousand factories.

“The problem is that Marutis and Audis are all put together as the same,” said Ashish Kumar, director-general of the Central Statistical Office. In other words, by gauging only the volume of production, the old series was overlooking changes in monetary value brought about by product improvement and differentiation.

In the old GDP series, a yearly survey of industrial firms supplemented the production index when it became available. But that survey, too, has a limitation: Because it measures activity at the factory level, it doesn’t account for the marketing, development, logistics and financial-planning activities that take place at manufacturing firms’ head offices.

“In the earlier series, we were not capturing this,” Mr. Kumar said. “Because we never had access to any such information.”

The new GDP series therefore incorporates a new database of company balance sheets from the Ministry of Corporate Affairs. For the year ended March 2012, the database includes information from more than 500,000 firms. A central-bank study that had been used previously to gauge corporate activity covered fewer than 2,500 companies.

The impact on final growth rates is huge—and still slightly hard to swallow. In the 12 months that ended March 2013, manufacturing expanded 6.2% in the new GDP series, compared with 1.1% in the old. And in the following year, for which the old series had shown a 0.7% contraction, the new series has manufacturing growing by 5.3%.

2. All workers used to be equal, too. Well, at least for gauging activity in the informal economy. Small, unregistered companies—a major chunk of the Indian economy—typically employ unpaid helpers in addition to owners and hired workers. But before, these firms’ output was being estimated by taking the total number of workers and multiplying by per-capita added value.

No longer. The new GDP series uses an “effective labor input” method, which assigns different weights to different kinds of workers based on their productivity. The chart is here:

3. Agriculture isn’t just about crops, and livestock isn’t just about meat. Two major changes in the agricultural component of the new GDP series have to do with livestock. The first is a new way of valuing “meat byproducts.” State governments had been failing to provide direct data on the values and quantities of animals’ heads, legs, fat and skin on a “systematic and regular basis.” So, thanks to a study by the National Research Center on Meat, in Hyderabad, these are now being recorded simply as a share of the total value of the animals’ flesh.

Yum. “EOG” stands for “edible offals and glands.”

The second major change to livestock measurement has to do with a different kind of byproduct. “For the first time, we have included the evacuation rate of goats and sheep in the production of organic manure,” said Sunil Jain, a deputy director-general at the statistics office.

Translation: Using a study on how much those animals defecate, statisticians have added that particular kind of biological output to their economic value.

The estimated “evacuation rates” are 0.3 kilograms per day for goats and 0.8 kilograms per day for sheep. The study, titled “Positive Environmental Externalities of Livestock in Mixed Farming Systems of India,” was conducted jointly by the Central Institute for Research on Goats, in Makhdoom, Uttar Pradesh, and the National Center for Agricultural Economics and Policy Research in New Delhi.

http://blogs.wsj.com/indiarealtime/2015/04/17/indias-new-gdp-numbers-a-peek-under-the-hood/#?mod=wsj_valettop_email
Riaz Haq said…
India’s Finance Mnister Arun Jaitley forecast exactly a month ago that the country’s GDP growth rate will be 7.5 percent this year. He attributed this entirely to the dynamism of the government led by Prime Minister Narendra Modi formed after the 2014 parliamentary poll. “During the last few years we had fallen off the radar, our growth had slowed down, our priorities were blurred and the world was accusing us of policy paralysis. Finally people of India decided to bring about a change”, Jaitley said in a thinly veiled condemnation of the previous government led by Prime Minister Manmohan Singh, an acclaimed economist himself, who is credited with piloting the country’s free-market reforms.

“This year we will close at 7.5 percent GDP growth and next year hopefully higher,” Jaitley predicted. Jaitley is a no-nonsense lawyer by profession and is a successful politician. To be sure, as India’s finance minister, his words carry weight within the country and abroad.

They influence even the IMF, which has since acclaimed that India is poised to “overtake” China in growth. That’s a tongue-in-cheek remark, of course, because who doesn’t know that China’s economy has outstripped India’s by four decades or more already and comparing India with China is no more than a folk tale. But then, perceptions form the stuff of our day-to-day life and most of us Indians are not trained economists.

Unsurprisingly, the widespread perception in India today is that the country has finally caught up with China in growth and development. For a country smitten by a keen sense of envy bordering on rivalry vis-a-vis China, this easily transmutes as the stuff of national pride. And Prime Minister Narendra Modi suddenly looks ten feet tall.

Even President Barack Obama took note, which was only to be expected since the lure of the fastest growing market in the world is there on his mind always. The Indian market is important for boosting US exports and creating jobs in America and it could not have escaped Obama’s highly focused mind.

Obama probably thought it will be a clever move on his part to pen a panegyric on Modi. There couldn’t be a better way of flattering Modi, after all. And, believe it or not, amidst all that ugly, exasperating wrangle with the US Congress over the Iran deal, Obama was quietly writing a panegyric on Modi!

But nothing works well for Obama thse days and the Time magazine’s piece by the US president on Modi, which appeared yesterday, however, turned out to an overkill that might even embarrass Modi, who usually likes flattery.

Obama probably thought it pays to cater to Modi’s vanities, since he knows Modi can take arbitrary decisions and that can be useful for promoting American business interests. But he stepped way out of line by bracketing Modi with Martin Luther King and Mahatma Gandhi. The point is, like what the famous song supposedly about Sophia Loren says, Obama never looked inside Modi’s head.

Obama’s panegyric most certainly inspired Jaitley to exceed his own month-old prophecy. He now believes that India has the potential to make nine to 10 percent growth rate “a new normal.” He made this prophecy at a US-India business conclave organized by a Washington-based think tank.

If Obama gets to hear what Jaitley just announced, maybe, he will now do an oil painting of Modi. Anything is possible. Obama has a focused mind.

To be sure, Jaitley has proved to be a past master in the ancient Indian rope trick. He has done a masterly job in stringing the public opinion and duping Obama by creating the misperception that under Modi’s magical touch, Indian economy has turned the corner and is zipping ahead.


http://atimes.com/2015/04/how-india-bettered-chinas-growth-story/
Riaz Haq said…
#India’s sharp growth picture gets fuzzy. #Indian GDP is rough estimate, not actual measurement http://on.wsj.com/1STK2Te via @WSJ #Modi #BJP

India’s economy expanded by 7.3% last year, outpacing every other major nation, including China, for the first time in nearly two decades.

But as with most developing countries, where official statistics can be dicey even when they aren’t showing world-beating growth, India’s economy defies easy measurement. Most enterprises are tiny and unregistered, and most workers are employed off the books. The government’s infrequent surveys represent only a best guess of the value being added in back-alley workshops, outdoor markets and other cash-based corners of the economy.

So even if India’s measurement of gross domestic product, a broad indicator of activity, isn’t thought to be politically manipulated like China’s, it should come with a warning label: Handle with care.

GDP in India, “much more than in other economies, is more an estimate than a measurement,” said Neelkanth Mishra, a Credit Suisse economist in Mumbai.

The fog surrounding India’s GDP places challenges before analysts and policy makers—and just plain baffles some of them. The country’s central bank, sensing an economy running at less-than-full blast despite strong headline growth, has cut its main interest rate five times since the start of 2015.

One reason for the data murkiness can be found on Lal Bazar Street, a busy thoroughfare of tea merchants, typists-for-hire and a sitar shop in the heart of Kolkata, the country’s onetime colonial capital.

Within the dingy commercial buildings that line the roads in all directions are hundreds of addresses used to register shell companies, or ones used for tax-avoiding financial maneuvers and little else, tax authorities say.

Yet because these firms regularly file balance sheets to the government, they appear in a new official database of corporations—and get counted when statisticians tot up India Inc.’s contribution to national output.

India’s numbers have been under a microscope since it revised methods for estimating GDP last year, causing performance in earlier years to shoot up. Growth stayed brisk throughout 2015 even as exports, cargo traffic and other indicators disappointed.

A report from India’s Ministry of Finance said data-related uncertainty was causing economic signals to be “mixed, sometimes puzzling.”

The GDP revision included updates large and small. Based on an academic study of “dung evacuation rates,” goats and sheep were found to be contributing more to the economy, as producers of natural fertilizer, than previously thought. A much wider array of financial services is now being counted. But there are still areas where some observers, including the International Monetary Fund, see India’s data falling short.

To strip price changes out of a wide swath of GDP, for instance, India uses its wholesale price index—which, thanks to lower oil prices, has been decreasing for 17 straight months.

But many businesses, particularly services like finance and information technology, haven’t benefited much: Retail prices are still climbing at around 5% a year overall. If India’s statisticians were factoring in more of these price rises, then their inflation-adjusted GDP figures would be lower.

In a March report on India, the IMF criticized the use of wholesale prices in GDP. In a written response to questions, the country’s Central Statistical Office acknowledged the issue, but said that until India updates its inflation measures, the wholesale price index “remains the best available alternative.”

“There’s no rhyme or reason why the service sector would be deflated by WPI,” said Kunal Kumar Kundu, Société Générale SA’s India economist. “It’s basically a data availability issue. That will always continue to be a challenge.”
Riaz Haq said…
From being world leader in surveys, #India is now facing a serious #data problem: NSS #GDP estimate half of CSO's

http://blogs.economictimes.indiatimes.com/et-commentary/from-being-world-leader-in-surveys-india-is-now-facing-a-serious-data-problem/

The National Sample Survey (NSS), when launched by the NSSO in 1949, was the most ambitious household survey in the world, covering over 1,800 villages and over 100,000 households across India. The methods used by the NSS became the standard for household surveys the world over.

For example, the use of inter-penetrating samples — essentially, two independent samples drawn from the same population — to test the reliability of the survey results, was developed by Mahalanobis in a 1936 paper and remains a standard tool for survey design. The Living Standard Measurement Surveys the World Bank still carries out in many countries are a direct descendent of the NSS.


We quibble about whether growth was 7.1% or 7.4%, ignoring the fact that our two main sources of official consumption data, the NSS and the GDP data produced by the Central Statistical Organisation (CSO), now tell entirely different stories.
If you believe the NSS, GDP could be just about half of what it is according to the CSO. There are occasional academic debates about which one is correct, which no one in power pays any attention to. And yet, it is almost surely true that both estimates (and their growth rates) are off by a huge margin. More worrying, this divergence has been known for nearly 50 years (though it has grown a lot).

And though we are occasionally told that the NSS is understaffed, or that no one knows where the CSO got a particular number, there is absolutely no political interest in improving things. From being the world leader in surveys, we are now one of the countries with a serious data problem while people talk about the really good data you can get in Indonesia or Brazil or even Pakistan.

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