What is in a number?

The system of releasing numerous GDP growth estimates over three years calls for an overhaul. Budget making will also benefit as a result

The National Statistical Office provides as many as six iterations of its estimates of the annual size of the Indian economy for any single year. These numbers are released over a period of 36 months. A comparison between the first and final iterations of the gross domestic product (GDP) number for the same year brings out significant variations. In some years, the variation reflects an overestimation made in the first print, while in others, there is an underestimation.
 

For instance, real growth in India’s GDP in 2016-17 was 7.1 per cent, according to the first advance estimate (FAE). But the sixth and final iteration of that number through the third revised estimate showed the GDP growth for 2016-17 at 8.3 per cent. Something similar happened in 2017-18, although the range of variation was smaller — from 6.5 per cent in the first estimate to 6.8 per cent in the final estimate.
 

The problem in 2019-20 was one of overestimation. The GDP number, according to the FAE for 2019-20, was 5 per cent, but this was scaled down to 3.7 per cent by the time the second revised estimate was released in January 2022. One must wait and see if the third revised estimate, the final print, to be released by the end of this month, brings it down further or revises

it upwards.
 

Even during the Covid years, the problem of variation did not go away. Against a contraction of 7.7 per cent, according to the FAE for 2020-21, the latest number in the fourth iteration or the first revised estimate shows a smaller contraction of 6.6 per cent. Similarly, the growth figure for 2021-22 has already seen a scaling down from 9.2 per cent in the FAE to 8.7 per cent in the provisional estimate, which is the third iteration.

Illustration: Binay Sinha

 

Such sharp variations in the GDP numbers under different iterations of national income estimates play havoc with any realistic and reasonable planning based on numbers. Policy planners and economists are reduced to grappling with the frequently changing numbers as and when they are released. Consequently, their assessment of the economy’s actual performance and potential is an obvious casualty.
 

The excitement over the 7 per cent real GDP growth estimate for 2022-23, released through the FAE last week, should, therefore, be substantially qualified with the possibility that this number could undergo significant revisions in the next five iterations to be made available over the next three years. A 7 per cent growth rate now for 2022-23 could well turn out to be 6 per cent or even lower in 2025 or even 8 per cent. But by then, general elections would have gone by and the debate over India’s 2022-23 growth would have become stale and outdated, with even the media paying scarce attention to the revised numbers.
 

For policymakers and economists, this could be nightmarish. India’s data collection system has many problems. But this specific problem of variations of national income over a period of three years does not seem to have received the kind of attention that it deserves.
 

However, there is an understandable reluctance on the part of the political establishment over the years to address this problem. For politicians, at the helm of the Union government, such changes appear to suit their desire to paper over difficult and unpalatable economic news.
 

A 5 per cent growth rate for 2019-20, announced in January 2020, certainly helped varnish the government’s reputation of economic management and by the time the actual economic growth rate of less than 4 per cent surfaced three years later in January 2022, the damage had been minimised with the overall political narrative over deft economic management staying intact. Or consider for that matter how the first revised estimate of GDP growth for 2017-18 was pegged at 7.2 per cent, which was scaled down by two subsequent iterations to 7 per cent and 6.8 per cent, respectively. The first revised estimate was released in January 2019, a few months before the general elections. There could be many statistical reasons for these variations, but there is no denying that problems arising out of such significant variations and six revisions of the same set of numbers on national income need to be quickly resolved.
 

There is yet another reason why the problem of these variations should be addressed without delay. The FAE of GDP for any single year serves as an important input for the Union Budget that is prepared for the following year. For instance, the 7 per cent real growth (which in nominal terms is estimated at 15.4 per cent) in 2022-23 provides the basis for projecting the growth in the nominal size of the economy and the government’s revenue as well as expenditure in 2023-24. Now, if this growth number is either an underestimation or an overestimation by about 1.5 or 2 percentage points, then this would have an avoidable impact on Budget planning. The nominal growth projections for 2023-24 might also suffer as a consequence.
 

There is another problem. With such rapid changes, keeping track of the actual fiscal deficit estimates becomes difficult. In 2021-22, for instance, the fiscal deficit of 6.8 per cent of GDP, according to the Budget estimate, will turn out to be lower at 6.7 per cent when the actual numbers are out, even though the government’s borrowing went up from Rs 15 trillion to Rs 15.86 trillion. Remember that the Centre gains in the process. It manages to spend more without tarnishing its record on meeting the promised fiscal consolidation target.
 

Something similar is likely to happen in 2022-23 as well. Even though the borrowing level may remain the same, the government’s deficit is set to decline from the Budget estimate of 6.44 per cent of GDP. This will obviously give the Centre some leeway in presenting a more creditable performance on fiscal consolidation. The trick seems to be to under-promise on fiscal consolidation and over-deliver with the help of improved nominal growth numbers.
 

Many of these changes in Budget numbers take place because of higher expenditure pressure, which may be offset by unexpected revenue buoyancy. But a few of these sharp fluctuations in key numbers could be eliminated if the variations in the base numbers for the country’s national income are kept under reasonable check and released over a period of less than 36 months. If the United States could release such data with fewer iterations and in a reduced period of time, there is no reason why India should not be able to emulate this.