On 3 June this year, writing in the Economic Times’ editorial page, the journalist Abheek Barman declared that, “At 7.6%, India is the fastest-growing economy or the best data fudger.” Barman, a consulting editor with the news channel ET Now, called the gross domestic product estimates released by the government on 31 May “a crazy statistical fudge” and “a delight for emperors in need of new clothes.”
For these serious accusations, he had the following to offer as evidence. “The bulk of growth has apparently materialised from Rs 140,000 crore—try wrapping your mind around that number—of ‘discrepancies’ in our balance sheets,” he wrote. Barman said that TCA—the chief statistician of India, TCA Anant—“has conjured up a more than four-fold jump in ‘discrepancies’ and padded it to the GDP number.” He added, “Take away the rubbish in data”—read discrepancies— and “our actual growth rate is around 4%, about half of what is being claimed.”
It wasn’t just the Economic Times. Mainstream media was flooded with opinion pieces that alleged data fudging by the government, citing the discrepancies figure as evidence. Many publications repeated the claim that, if one excluded the discrepancies from the GDP, the growth rate would come down to around 4 percent. A Huffington Post headline read “Gross Discrepancies Projected,” while one in Mint claimed “Discrepancies drive GDP growth.” The most alarming headline came from the Deccan Chronicle, which interpreted “discrepancies” literally, and used a perceived synonym in its headline: “India admits to errors in GDP numbers.”
All these analyses were off the mark, and showed a failure to understand what the term “discrepancies” means in economics. India, like most countries, measures its GDP in two ways: by summing up production and by summing up expenditure. Theoretically, the amounts arrived at through the production method and the expenditure method should be the same. But, in practice, the numbers do not tally for a variety of reasons: primarily because the intricacies of each method make some variation inevitable, but also because data sources vary widely and differ in quality. The declared GDP is that arrived at through the production method, and the difference between this and the expenditure figures is announced as an item called “discrepancies.” The expenditure figures, and thus discrepancies, are expected to be revised over time, when better data come in. For instance, the provisional estimates for the last quarter of the 2015 financial year pegged discrepancies at 3.4 percent of the GDP, but the figure came down to 1.1 percent in the revised estimates. The numbers released by the government on 31 May were provisional estimates.
Unsurprisingly, the response from pro-government quarters to the media’s coverage was swift. Pronab Sen, the former chief statistician of India; Bibek Debroy, a member of the NITI Aayog; and TCA Anant, among others, wrote articles and gave interviews debunking the allegations. They explained what “discrepancies” meant, and how they are inevitable whenever GDP is measured in any country. They rightly pointed out that excluding discrepancies to arrive at “our actual growth rate,” as Barman suggested, was a ridiculous proposition. Unfortunately, the media’s disproportionate focus on discrepancies allowed the government and its supporters to avoid answering more serious questions about GDP numbers. Instead, they got away with doling out simple economics lessons.
Not that even these were entirely satisfactory. Debroy, Anant and Sen all claimed that the recent discrepancies category figure was not an outlier. Anant cited older figures in support of his argument. “In current prices, the discrepancies were 6 per cent in 2012–13 in the estimates which was released in January. It was 5.8 per cent for estimates released in 2007-08,” he said in a press statement. “So there have been many years, where discrepancies have been high.” It is unclear which numbers Anant is citing here: yearly or quarterly, provisional or revised. And, as he says, his numbers are in current and not in constant prices—which means the effect of inflation hasn’t been taken into account. When I checked the numbers at constant prices, the discrepancies for both the 2015–16 financial year and its last quarter were abnormally high compared to those of recent years.
High discrepancies do need to be discussed to understand how efficient India’s process of data collection is. In many developed countries, the figure is usually less than 1 percent. An unusually high count for the discrepancies item may not be proof of manipulation of data, but it does raise questions over the quality of data.
This misguided furore over discrepancies took the spotlight away from several more serious questions on the veracity of the government’s GDP numbers. Their reliability was first questioned when the government changed the calculation methodology last year. The three major alterations included the change of base year, from 2004–05 to 2011–12; the adoption of the United Nations’ System of National Accounts 2008, or SNA 2008; and a change of database and the method of using it.
The change in base year was a routine step, and the adoption of the SNA 2008 was seen as a welcome development. But the government’s decision to change the database used to calculate the private sector’s contribution to the GDP, from the Reserve Bank of India’s database to that of the ministry of corporate affairs, came under heavy criticism. The economist R Nagaraj, writing in the Economic and Political Weekly, claimed that the new database included multiple “shell,” or “bogus,” companies, and that a change in calculation methods further inflated the numbers. He criticised the methodology, and asked for the ministry’s database to be made public. Though the government has defended the use of the new database, it hasn’t responded to demands to let the public access it. This is ill-advised; the country’s image would suffer less if its growth rate was found to be slow than if the world grew suspicious of the data it uses to calculate GDP. This argument has hardly been raised in the mainstream media, which could have played a bigger role in highlighting it.
The energy devoted to the GDP debate also diverted attention from troubling signs in other economic indicators, such as bank credit, exports and investments—the very drivers of growth. Bad loans given out by public sector banks are on the rise. A 13 July report by the rating company India Ratings and Research predicted that, in coming years, loans granted by public sector banks are going to grow at the slowest rate in two decades. Exports have declined by 5.2 percent.
But the most alarming thing of all has been the slump in investments. In the last three years, astonishingly, the growth rate has been rising consistently, even as there has been a sustained drop in the investment rate. Investments are measured through an indicator called the gross fixed capital formation, or GFCF. As a percentage of the GDP, the GFCF has come down from 31.6 percent in the 2014 financial year to 30.8 percent in 2015, and further down to 29.3 percent this year. Though India’s growth rate has overtaken China’s, the neighbouring country’s GFCF has been consistently higher than that of India. The persistent increase in the high growth rate alongside a drop in the rate of investments seems inexplicable.
This dissonance between growth rate and macroeconomic indicators in India has already fuelled scepticism worldwide. In early July, the US state department released its annual review of the investment climates in various countries. The report said that India’s “approximately 7.5% growth rate may be overstated.” This prompted Anant to give another interview to The Hindu, in which he said, “GDP does not talk about any specific event. It does not talk about credit or exports, though they are all components of GDP measurement. If we look at individual items, we will get different pictures … Conceptually, it would be incomplete and incorrect without a complete model for analysts to pick up partial pictures and say that this is the reality.” Anant’s response was unsatisfactory, since it mischaracterised the issues raised about the GDP numbers. The critiques based on economic indicators did not analyse mere “individual components” of the economy, but pointed out the absence of factors that make growth possible.
More broadly, the controversy over discrepancies was an indication of the poverty of the Indian media’s discourse on the economy. Most debates on the country’s economic well-being show an unhealthy obsession with numbers, and especially GDP estimates, when, in fact, the metric’s utility is being questioned the world over. It is becoming increasingly accepted that growth is merely a subset of development. GDP, and therefore growth, fails to account for other important indicators—thus failing to give a holistic view of the health of an economy.
The GDP-obsessed analysis emphasises quantity over quality—to use a medical analogy, it focusses on treating an illness by exponentially increasing the dosage of a particular drug, when another medicine might improve a patient’s health. Further, GDP does not measure income inequality, and thus obscures the fact that a country can show high growth rates even as only a wealthy few prosper at the cost of a poor majority. The depletion of natural resources to increase growth also goes unaccounted for in GDP estimates. By now, these criticisms are well known in Western media.
As a result, governments and economists have been looking for better alternative models, over a hundred of which have been proposed. Though no country has stopped measuring GDP, many have tried to complement it with better indicators to assess national economic well-being. One of the most prominent initiatives to find better ways of understanding national economic health is Beyond GDP, which involves numerous international organisations, including the European Union and the Organisation for Economic Co-operation and Development, or OECD. The OECD ranks its 35 member countries using a metric known as the Better Life Index, whose 11 main indicators comprise housing, environment, income, jobs, community, education, civic engagement, health, life satisfaction, safety and work-life balance.
Another alternate model, called the Genuine Progress Indicator, or GPI, has been adopted by Finland and many US states, including Washington, Vermont, Maryland and Hawaii. According to a Washington state government website, the GPI has been formulated to “complement” the state GDP, so as to “better articulate the actual lived-experiences of its people.” The indicator includes 26 individual metrics under three main categories: economic, environmental and social. In India’s own neighbourhood, Bhutan, in 2008, introduced the Gross National Happiness index, which also includes social and environmental metrics.
The only major metric used by India besides the GDP is the Human Development Index, which just assesses health, education and income. In the Indian context, it is imperative that an index is developed that, along with economic growth, assigns value to the environment, natural resources, quality of life, inequities of caste, class and gender and political freedom, among other factors. Economics journalists would do the country’s public discourse considerable good if they focussed on questions like this about the GDP, rather than making wild allegations of data fudging.