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V1C10: IS INDIA’S GDP GROWTH RATE OVERSTATED? NO!

Investment catalyses the economy into a virtuous cycle: 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.

Recent initiatives taken to foster investment in the economy:

  • Relaxing FDI norms
  • Cutting corporate tax rates
  • Containing inflation
  • Accelerating infrastructure creation
  • Improving the ease of doing business
  • Reforming taxation.

Growth rate, a driver of investment:

The growth rate of the economy is a pre-eminent driver of investment decisions.

  • To achieve the objective of becoming a USD 5 trillion economy by 2025, a strong investment climate is critical.
  • The growth rate of a country’s GDP also informs several critical policy initiatives.

Uncertainty about growth rate:

Uncertainty about the country’s GDP growth and its magnitude can affect investment.

  • Uncertainty about growth rate stems from the Base Year revision of the GDP Series from 2004-05 to 2011- 12.
  • The revisions done in 30 January 2015 is in line with the System of National Accounts (SNA) 2008 of the United Nations.

The methodology undertaken to ward off any uncertainty:

Indian GDP growth rates are compared to those of other countries.

  • Assessment is made of Indian GDP growth rate if base year revision was not done.
  • This estimate is compared to the actual growth rate to infer any incorrectness.
  • This is assessed through Difference-in-difference (DID) model.

No evidence of misestimation is found:

Correct statistical and econometric analysis suggests no evidence of misestimation of India’s GDP growth.

  • Context: Former CEA Arvind Subramanian had said India’s GDP growth rate was over-estimated, by around 2.5 percentage points, between 2011-12 and 2016-17, due to methodology change for calculating GDP.
  • The Economic Survey counters former CEA’s charge.

Difference-in-difference (DID) model:

The economic survey uses DID model, which is an econometric technique that attempts to mimic an experimental research design by studying the differential effect of a quasi-experiment such as a GDP methodology change.

  • In fact, models that misestimate India’s GDP growth, also misestimate the GDP growth of other countries too:
    • Models that incorrectly overestimate India’s GDP growth by over 2.77%, also misestimate GDP growth over the same time period for 51 other countries out of 95 countries in the sample.
    • Several advanced economies such as the UK, Germany and Singapore turn out to have their GDPs misestimated when the econometric model is incompletely specified.

Conclusion

Concerns of a mis-estimated Indian GDP are unsubstantiated by the data and are thus unfounded.

Indian Economic Survey 2020 UPSC Summary Structural Differences Between the economies of India and the World
Indian Economic Survey 2020 UPSC Summary World Bank WDI Database Economic Survey 2020
Indian Economic Survey 2020 UPSC Summary Social Development Indicators in the Indian economy and economies of other countries
Rural Population with Water in Indian Economy and Economy of other Countrie
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