Media reports saying India admits to error in GDP figure untrue

Call it economic illiteracy or plain malicious intent, Indian media has done it again. India posted a GDP of 7.6% for the last financial year, which positioned it as the fastest growing large economy in the world. But some media reports were out to find non-existent chinks in this data. The Deccan Chronicle for example ran this headline:

Deccan Chronicle
Deccan Chronicle

The popular site “The Logical Indian” too attempted to raise questions about the GDP, albeit with dubious logic and poor English. The central question revolved around the data point in the GDP figures which is called “discrepancies”. The Deccan Chronicle chose to rename this technical term as “errors”, which made it appear as if the the GDP data itself is erroneous.

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So what are these “Discrepancies”? It was well explained in this article on the Wall Street Journal:

Understanding these “discrepancies” requires first understanding that an economy’s size can be measured in three ways: by totalling up the value of all goods and services that are produced, by totalling up the amount that gets spent on those goods and services, or by totalling up what’s earned by selling those goods and services.

In theory, all three methods should yield the same number: GDP. In reality, it’s complicated. And in India, it’s even more complicated.

The country’s statisticians first calculate GDP from the production side, with GVA and taxes and subsidies as outlined above. They then compute another GDP estimate by adding up various kinds of spending, from personal consumption to business and government investment. But because timely, reliable spending data aren’t available in India, the two GDP estimates don’t usually match.

The difference between them is what’s labeled “discrepancies.” And this amount, whether positive or negative, gets added to the expenditure-based estimate in the reported data so that the two estimates come out equal, just as they would be in an ideal world.

In short, “discrepancies” is an element inserted just to balance the GDP equation, so that it fits the theoretical formula. The country’s chief statistician T.C.A. Anant further explained that:

Discrepancies don’t represent an actual part of the economy. They are inserted just to make an accounting relationship hold true. If India collected better data on expenditure, discrepancies would be closer to zero.

He reiterated that “it doesn’t make sense to say that the magnitude of discrepancies is causing GDP growth to be overstated”. These views were echoed on twitter by economists such as Dr Bibek Debroy and Dr Arvind Virmani, who were almost at wit’s end explaining the technical jargon to lay people. Even Huffington Post reported that the analysts and economists they talked to had no reason to doubt the GDP figures. Later, Debroy, who is also a member of the Niti Aayog, even wrote an article to explain the point in layman’s terms:

I asked someone what her income was last month; she gave me a figure and produced a pay-slip. I then sought to know how she had spent the money; she thought of various items but couldn’t account for Rs 15,000. I told her, I believed neither her income figure nor her pay-slip. I am sure you agree mine was a stupid statement.

Notice that just because I have been unable to explain how some income was spent, that income doesn’t vanish into thin air; any more than Rs 15,000 from a pay-slip becomes “spin”. There is no dispute about those goods and services (their value) having been produced.

In summation, India has more data from the supply side, but inadequate data from the expenditure or demand side, which is why although supply side information gives the correct picture due to better data availability, expenditure side information falls short, hence the variable which is unknown is labelled as “discrepancy”. “Discrepancies” are essentially a balancing item, but also represent components which do not fit into a specific category. Also, in case of India, inventory data is quite poor, so looking at both inventory and discrepancies helps narrow the impact over time. To call this discrepancy an “error” is nothing short of malicious intent.

co-founder, OpIndia.com

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