The debate on the veracity of the official data on India’s gross domestic product (GDP) growth has resurfaced with former chief economic adviser Arvind Subramanian’s latest academic paper, where he says that growth was probably overstated in the five fiscal years to 2016-17.
Subramanian’s argument is that fiscal and monetary policies were overly tight in the past because growth was overestimated. That would mean the Reserve Bank of India (RBI) was too late in its accommodation to stimulate growth.
This is the crux of the argument. Response to growth and inflation by policymakers should not just be right, but also be timed right. Flawed data costs policymakers time, as monetary policy could hold off responses judging that the situation is not extreme.
Economists believe that there is a long way to go for Indian statistical data to become robust and overestimation has indeed led to erroneous policy judgements. The problem is acute for RBI because its job is to respond to demand conditions and, an overestimation of industrial growth would mean the central bank would be too focused to chip off demand to cool inflation, according to an economist with a foreign bank.
“Yes, possibly policy was tighter than it was supposed to be because of overestimation," said the economist cited above, requesting anonymity.
The silver lining in this dark cloud is that economists and RBI look at other indicators as well. “We use a whole set of high frequency indicators to assess the current state of the economy, and we do not base our assessment just on the headline GDP growth rate," said Sonal Varma, managing director and chief economist (India and Asia-ex Japan) at Nomura Singapore Ltd.
Varma added that the central bank focuses more on the direction of growth and inflation rather than the number itself.
In addition to GDP, the standard dashboard includes Purchasing Managers’ Index, core inflation, headline inflation and also RBI’s own surveys on business and consumer sentiment. Most important for RBI would be the output gap. “The estimation of output gap does not change. The best indicator of whether there is output gap or not is core inflation. And, the momentum in core inflation, which was very high in 2018, has eased off in the last six months, which indicates that the output gap was positive last year and it is negative now," said Varma.
Moreover, high core inflation in past years shows that RBI may not have erred enormously. “With stubborn core inflation, we couldn’t really expect an ultra-loose policy," added the economist cited above.
That does not negate the fact that the central bank’s response probably was delayed because growth estimates were not showing weakness. It’s high time policymakers make amends and make the process of GDP estimation robust.