From the Viewsroom

Flaws in Subramanian’s theory

M. Ramesh | Updated on: Jun 13, 2019
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He takes an oversimplified view of factors driving GDP growth

Arvind Subramanian’s theory that India’s GDP has been overestimated (yes, out of innocent and non-political motives) is specious not for what it says, but for what it does not. His assertion, born of labours of econometrics and replete with colourful graphs, charts and dots, is basically founded on the reasoning that while several indicators of the health of the economy rhymed with growth numbers for many years up to 2012, they didn’t in the years after. Hence the conclusion that the growth numbers must be wrong, because those that cause the growth in the first place don’t add up. A sudden fall in correlation, he says, makes such a conclusion inevitable.

Not quite. Clearly, the renowned economist discounts the possibility of different explanations for the lack of correlation. In fact, he didn’t even seem to think of alternative explanations. Take, for instance, the drop in correlation between electricity consumption and growth. How could you grow so much without consuming corresponding quantities of electricity, is the question that bothers Subramanian. The country has made enormous strides in terms of energy efficiency — with LED bulbs in the place of energy-hungry incandescent bulbs, replacing rickety motors in industries with smart ones that spin only as much as they are required to, and so on. Likewise, for agriculture. Uttar Pradesh is brimming with sugarcane, Madhya Pradesh with soyabean and this is what has caused the agrarian distress in the first place — more supply than demand, causing a price crash. Assume a farmer produces twice as much on the same piece of land — he is still not going to need two tractors to harvest it. So poor tractor sales do not reflect poor agricultural growth.

As one analyst has observed, if Subramanian’s conclusions were true and GDP realistically re-assessed, it would reflect an incredibly sharp spike in the tax-to-GDP numbers — around 20 per cent, against the official figure of 17.8 per cent.

For all you know, Subramanian could be right. But, just as you acquit an accused for want of evidence, you have to — till more evidence surfaces — discard the ‘GDP overstated’ theory.

Published on June 13, 2019

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