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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.

In recent times, there has been significant debate about the veracity of India’s GDP growth rates, with particular focus being placed on these growth rates following the change in the GDP estimation methodology in 2011-12 (see Box 1 for a note on the revision). Both national and international experts including Bhalla (2019), Goyal and Kumar (2019), Roy and Sapre (2019), Panagariya (2019), Purnanandam (2019), Subramanian (2019) and Vaidya Nathan (2019) have contributed to the debate on whether the GDP growth rates in India are correctly estimated or not. As concerns about the veracity of India’s GDP growth rates may generate substantial concerns not only to investors but also to policymakers, this issue warrants a careful examination.

Such an examination is important especially given the slowdown in the GDP growth rates over recent quarters. If investors apply a “discount” to a lower growth rate, even if incorrectly, the same can really affect investor sentiment. This chapter, therefore, studies this important issue.

The aim of the chapter is to estimate the inaccuracy, if any, in the GDP growth rate using the difference-indifference methodology as implemented in Subramanian (2019) and Purnanandam (2019). Estimating the inaccuracy of any measured variable requires a benchmark for the “accurate estimate”, which by definition represents a “counter-factual”, i.e. one that is not revealed in fact and therefore has to be estimated. This assessment is undertaken by comparing the Indian GDP growth rates to those of other countries. Effectively, this methodology asks the question “what would have been the estimate of the Indian GDP growth rate if the methodological change had not been implemented” and compares this estimate to the actual growth rate to infer the incorrectness in the estimates.

This methodology is similar to ones that researchers in medicine use to estimate whether a drug is effective or not. For concreteness, think of testing a drug for blood pressure (BP). Create two groups of identical guinea pigs – a treatment group that is administered the drug and a control group that is given sugar pills. Identical groups ensure apples-to-apples, instead of applesto-oranges, comparison. When the groups are identical, before-after difference in BP for treatment group minus the same difference for control group estimates the correct effect of the drug by removing any confounding placebo effects. Effectively, the change in BP for the control group asks the question “what would have been the change in BP even if the drug had not been administered?” This methodology that researchers call “difference-in-difference” is used extensively in economic research.

Change in the Base Year of the GDP Series

The Base Year of the GDP Series was revised from 2004-05 to 2011-12 and released on 30 January, 2015 after adaptation of the sources and methods in line with the System of National Accounts (SNA) 2008 of the United Nations. The methodology of compilation of macro aggregates was finalized by the Advisory Committee on National Accounts Statistics (ACNAS) comprising experts from academia, National Statistical Commission, Indian Statistical Institute (ISI), Reserve Bank of India (RBI), Ministries of Finance, Corporate Affairs, Agriculture, NITI Aayog and selected State Governments. The decision taken by the Committee was unanimous and collective after taking into consideration the data availability and various methodological aspects.

For the purpose of global standardization and comparability, countries follow the SNA evolved in the UN after elaborate consultation. The SNA 2008 is the latest version of the international statistical standard for the national accounts, adopted by the United Nations Statistical Commission (UNSC) in 2009 and is an update of the earlier 1993 SNA. The Inter-Secretariat Working Group on National Accounts (ISWGNA) in India was mandated to develop the 2008 SNA through intense discussions and consultation with member countries. India also participated in the deliberations of the Advisory Expert Group. In its adoption of the 2008 SNA the UNSC encouraged Member States, regional and sub-regional organizations to implement its recommendations and use it for the national and international reporting of national accounts statistics based on the available data sources.