Rewriting economic history: The perils of GDP backcasting: Montek S Ahluwalia

Relevant For GS & Essay:-

• The recently released “backcast” of the gross domestic product (GDP) series brought to mind former governor Y.V. Reddy’s much quoted witticism, “The future is always uncertain, but in India even the past is uncertain.” The backcast has certainly rewritten history. The average growth rate in the six years of the United Progressive Alliance (UPA) from 2005-06 to 2010-11 has been reduced from 8.8% in the earlier series to 7.2%. The National Democratic Alliance (NDA) government can now claim that their five-year performance—which is likely to be around 7.3%—is better than the UPA’s in its high growth period. It also erases the proposition that was widely accepted earlier, that India has demonstrated the capacity to grow at 8-plus per cent over an extended period.
• There is nothing wrong with rewriting history as long as it is based on sound evidence. But is it? I have serious reservations for the reasons outlined below.
• Those who lived through the years 2005-06 to 2010-11 will recall that all the information at the time suggested that the economy was booming. This was true whether one looked at the industrial production index, growth of corporate earnings, growth of corporate investment, export performance, or industry-specific data such as sale of cars, two-wheelers, and other consumer durables. It was also true of the mood of business. Sceptics could legitimately question whether the boom was sustainable, or merely a reflection of irrational exuberance. However, to be told there wasn’t a boom at all simply fails the “smell test”.
• The backcast fails other tests as well. Both series were calculated for the three years 2011-12 to 2013-14. The average growth rate for the years covered by this period was 4.6% in the old series and this increased to 5.7% in the new series. That suggested that when the backcast of the new series became available, the growth rate for the earlier period would be higher.
• The Sudipto Mundle committee, appointed by the National Statistical Commission, came to precisely that conclusion. The committee attempted a backcast based on the “production shift” method and the average growth rate for the six-year period 2005-06 to 2010-11 increased from 8.8% in the old series to 9.2%. This was obviously found to be politically inconvenient and the Mundle report was disowned as not being official and unceremoniously pulled off the website of the ministry of statistics and programme implementation.
• The “official” backcast now issued has reduced the growth in the UPA period by a full 2 percentage points compared with the Mundle committee estimates. The new numbers have been prepared under the guidance of the recently appointed chief statistician P. Srivastava, who was earlier a member of the Mundle committee. The argument that the method now being used is “compliant” with the UN System of National Accounts (SNA) is neither here nor there. The Mundle committee’s production shift method was also completely compliant. The UN system offers a menu of options and one must be able to justify the choice on merits.
• Governments have a monopoly in producing official statistics and all monopolies need credible regulation. Ideally, the production of key economic data should be outside the control of governments, which have an understandable interest in statistics making the government look good. NDA 1 had removed the statistical system from the administrative control of the Planning Commission and put it under the ministry of statistics and programme implementation. However, this made the secretary, statistics, a generalist IAS officer, the administrative head reporting to a minister. The UPA went further by creating the position of chief statistician at the secretary level, who would be the administrative head of the system, with the National Statistical Commission, a high-level purely professional body, overseeing the quality of the data.
• When the new national accounts series (base 2011-12) was created, it was cleared by the National Statistical Commission. The official backcast now produced has not been similarly cleared because the position of chairman of the commission is vacant and has yet to be filled. The backcast series was released by the vice-chairman of Niti Aayog. This brings government back into data clearance, which is a retrograde step.
• A puzzling feature of the backcast is that although the growth rate in current prices is virtually identical to the old series, the constant price growth is much lower. Digging deeper, we find that the problem arises primarily because of the tertiary sector. Growth in this sub sector, which includes services of all kinds, measured in current prices in the period 2005-06 to 2010-11, is only marginally lower in the new series, 16% compared with 16.6% in the old series. However, the growth in constant prices is lowered drastically from 8.7% to 6.4%. One needs to look harder at what exactly has changed in the volume projections of this sector to make such a big difference.
• ]The real problem in producing a credible backcast is that the new data being used for the new GDP series going forward is simply not available for the past. The gaps in the data have had to be filled by using a large number of assumptions. The problem is that different assumptions lead to different results, as the Mundle projection clearly shows.
• So what should now be done? The National Statistical Commission, once it gets a chairman, should go into all these issues and advise whether the new backcast is reasonable, especially in view of the different results produced by alternative methods. They should also consider whether, in view of the large number of arbitrary assumptions that have to be made, it is desirable to have an artificially constructed backcast, or simply let the old series stay as the best description of the past and use the new series going forwards.
• An important point to keep in mind is that people must have confidence in the credibility of our statistical institutions. There are many countries that have suffered from a loss of credibility in official statistics and experience suggests that once credibility is damaged, it is difficult to restore. That can come to haunt us if we ever have to manage a crisis. Ideally, the National Statistical Commission should be established as a statutory body under law. An exercise had begun under the UPA, but it could not be completed. It is worth revisiting.