India GDP growth is one-third statistical illusion

June 5, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

India’s GDP growth is now one-third a statistical mirage. Unless something has changed dramatically in recent years in how companies and consumers behave, the economy is more likely to be expanding at 5 percent, not the 7.5 percent claimed by the authorities.

The illusion comes from a recent supposed improvement in the way India calculates its Gross Domestic Product. In theory, Indian GDP is now closer to international standards. In practice it has become utterly unreliable. Depending on it could easily lead India’s monetary policy astray.

This week, investors dumped Indian assets after the Reserve Bank of India cut its benchmark interest rate by a quarter percentage point. Central bank governor Raghuram Rajan felt compelled to explain why he had reduced borrowing costs five days after the country’s statistics office claimed stellar expansion in GDP. But investors were upset that Rajan was not doing more to revive a slowing economy.

But just how sluggish is the economy really? Breakingviews tried to answer that question by looking at three indicators: corporate earnings, auto sales and imports of computer software. The logic is straightforward: retained earnings finance new investment projects; auto sales are a proxy for consumer demand; while software imports reflect productivity gains. Mixing the three in a simple index suggests that growth in the most recent quarter was closer to 5 percent.

Combining indicators of demand and supply will annoy the purists. However, the rough-and-ready gauge reliably predicted GDP growth in the coming quarter between 2005 and 2011.

June_5_India_GDP_growth

Back then India’s methodology for adding up output was more robust. The new GDP data is another matter. Take the third quarter of 2013, when the country came perilously close to a currency crisis. The Breakingviews index shows GDP growth stalling. But according to the new official data, the economy grew at its fastest rate in nine quarters.

The faulty monitor continues to give misleading all-clear verdicts on the economy. It’s now more than a persistent irritant. There’s a serious risk that policymakers could underestimate the output shortfall, thereby aggravating the deficit. GDP is everywhere a statistical artifact; but in India, the illusion of growth is threatening to make the reality worse than it is already.

2 comments

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Even if there are flaws in the method used by authorities, the flaws are not exposed by the author. Authorities claim that they have followed International standard. This is also not contested.
Anyone can devise a new method which shall give a new figure of GDP. India’s economy is too complex to measure by just 3 parameters(corporate earnings, auto sales and imports of computer software) as done by the author.
India’s per capita income is so low that 7-8% growth is possible even if auto sales are down. We need at least 10% growth.

Posted by thinkingindian | Report as abusive

It is not even a Mirage. It is Indian Magic Tric.. While Politicians running on old ideas. Some of the companies With government having company with are Worst friends. It is Nothing short of disaster that India is Heading Into. The Last Shoe to fall is realties which are giving false sense securities

Posted by androtul | Report as abusive