India’s GDP Overstated by Up to 2% Since 2011-12: Ex-CEA Arvind Subramanian

Whilst as yet it’s too early to say how good or how inadequate is the new methodology for calculating GDP, which came into operation last month, India’s former Chief Economic Advisor, Arvind Subramanian, has pointed out that the old methodology, which came into operation in 2015, overstated GDP growth between 2011-12 and 2023-24 by 1.5-2 percentage points and between 2004-05 and 2011-12 it underestimated growth by 1-1.5 percentage points. He has identified two principal reasons for this. The first is errors and inadequacies in the way growth in the informal sector, which in this period was pretty close to 45% of the economy, was estimated. The second is the deflator. The old methodology used the wholesale price index which understated inflation and didn’t really capture prices in the services sector. So when economists would try to find answers to puzzles such as if growth is strong why is private investment so weak, why is FDI declining, why is capacity utilization, wage growth and employment growth so tepid, the real answer is that growth was not as strong as we thought. This also means that for most of the UPA years growth was underestimated whilst for the NDA years, starting 2014, it was overestimated.