Economic Survey Vol.1 Ch.10: Is India’s GDP Growth Overstated? No!

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To achieve the objective of becoming a USD 5 trillion economy by 2025, a strong investment climate is critical. The Economic Survey of 2018-19 laid out the role of investment, especially private investment, in driving demand, creating capacity, increasing labour productivity, introducing new technology, allowing creative destruction, and generating employment. Undoubtedly, investment assumes primacy in catalyzing the economy into a virtuous cycle. 

In recent times, India has taken several initiatives to foster investment, be it relaxing FDI norms, cutting corporate tax rates, containing inflation, accelerating infrastructure creation, improving ease of doing business, or reforming taxation. Investors, including international investors, see an unparalleled opportunity in India as it is one of the fastest-growing large economies in the world.

The growth rate of the economy is a pre-eminent driver of investment decisions. Moreover, the level and growth rate of a country’s GDP informs several critical policy initiatives by serving as a barometer of the economy’s size and health.

Need to check the mis-estimation of GDP

  • GDP estimate plays an important role in highlighting growth prospects of an economy which have a direct effect on investor sentiment.
  • If the evidence of a mis-estimation is credible and robust, a radical upheaval of the estimation methodology should follow.
  • Observations made by the Survey: The models that incorrectly over-estimate GDP growth by over 2.77 % for India post-2011 also misestimate GDP growth over the same time period for 51 other countries.  The variables that are used (export, import, a real credit to industry etc.) have unstable correlations with the GDP estimate. (i.e. the correlation between them varies from positive to negative)
  • The standard methodology makes a fundamental assumption of “parallel trend” and also does not account for the statistical risks.

Conclusion

  • The Survey states that the exact pattern of India’s GDP and how it evolves over time is far from clear.
  • Much more study is required in this regard.
  • The Survey suggests the macro-variables like GDP should be synergistically viewed with micro-level evidence. 
  • For example, The granular evidence shows that a 10 % increase in new firm creation increases district level GDP growth by 1.8 %. This district-level GDP growth must be viewed in consonance with country-level GDP growth.
  • New firm creation in the Service sector is far greater than that in manufacturing, infrastructure or agriculture. This is consistent with the macro fact on the relative importance of the Services sector in the Indian economy.
  • Emphasizing on the importance of India’s statistical infrastructure, the Survey has lauded setting-up of 28-member Standing Committee on Economic Statistics (SCES). 



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