GDP estimates fail to adequately capture informal sector

The inherent bias in GDP statistics is exaggerated when it treats performance in the unorganised sector and organised sector as the same.

A worker at a steel factory near Jammu, a file picture.  | Photo Credit: Channi Anand/AP

India, the Modi government never tires of declaring, is among the fastest growing economies in the world. Combine that with a one-year G20 presidency and a virtual lovefest with the United States as an ally against China, and a quick traverse to a seat at the superpower table seems a plausible dream. The recently released provisional estimates for GDP growth in the fourth quarter (January-March) of 2022-23 (FY23) and for that full year have given renewed cause to resell such hype.

A better-than-expected estimate of increase of 6.1 per cent during the fourth quarter has resulted in GDP growth being recorded at 7.2 per cent during 2022-23, which exceeds the earlier Reserve Bank of India projection of 6.8 per cent. But it is significantly lower than the 9.5 per cent recorded in 2021-22 when the economy recovered from the pandemic year 2020-21. This erosion of post-pandemic dynamism may be something to be expected. So, there may still be reason to celebrate.

However, despite these respectable growth rates over the two post-pandemic years, the overall growth of the economy since before the pandemic is disappointing to say the least. Even assuming that the “provisional” estimates are not off the mark, the GDP at constant price (at 2011-12 prices) in 2022-23 was just 9.7 per cent higher than in the pre-pandemic year. Thus, even ignoring the pandemic year drop, average growth over those three years is a mere 3.2 per cent per year, which is similar to the much-maligned “Hindu rate of growth” that was seen as characterising the Indian economy in the years before the embrace of liberalisation in the mid-1980s.

What is more, the estimates are indeed likely to be off the mark. As is the international practice, the method adopted in constructing GDP estimates is periodically revised to account for the changing structure of the economy and the availability of new sources of data. But not all revisions need to mark an improvement in terms of the accuracy of the estimates. In India, ever since the launch of the last updated GDP series with base year 2011-12, for which the estimation methodology was significantly revised, the view that the new estimates tended to overestimate the level and pace of growth of GDP has been held by a wide array of economists, including many from the establishment.

Informal sector the overwhelming majority

A long-standing criticism of the official GDP estimates has been that they do not capture adequately, if at all, the large informal sector that is the source of employment and livelihoods for an overwhelming majority of India’s labour force. Not only is that neglect seen to be true of the current series as well, but the contribution of the organised sector in this series is seen as inflated because of the use of a data source for manufacturing that exaggerates its performance. Moreover, other evidence suggests that the informal sector is performing poorly, not least of which is the evidence from both the Labour Bureau and the National Sample Survey Office’s Periodic Labour Force Survey that the inflation-adjusted “real” wages of casual workers and the real earnings of self-employed workers in the non-agricultural sector, have fallen or stagnated relative to their pre-pandemic levels.

It bears noting that the provisional estimates are based on extrapolations from quickly collected data (often obtained electronically), and are revised when evidence from more sources become available. It should come as no surprise that these “lead indicators” that are used to approximate the extent of movement of aggregates like GDP are sourced from the organised sector. This exaggerates the inherent bias in GDP statistics, by treating performance in the unorganised sector as being the same as in the organised sector, which it is not.

The resulting deviance between reported GDP growth and actual economic performance can be gleaned from evidence on a host of other variables. Consider, for example, the puzzle that growth in India’s GDP and employment diverge hugely. Data collected by the Centre for Monitoring Indian Economy suggest that the number of persons employed in the country has fallen from 408.9 million in 2019-20 to 407.6 million in March 2023 and the unemployment rate has risen from 6.3 per cent in 2018-19 to 7.9 per cent in March 2023. The sectors that are delivering India’s world-standard-beating growth rates are not absorbing enough workers to even sustain absolute employment by making up for losses in other sectors. Thus, the evidence from India’s IT- and IT enabled-Services sectors is that revenue growth runs ahead of growth of employment in the sector.

Highlights

• Despite the respectable growth rates over the two post-pandemic years, the overall growth of the economy since before the pandemic is disappointing to say the least.
• A long-standing criticism of the official GDP estimates has been that they do not capture adequately, if at all, the large informal sector that is the source of employment and livelihoods for an overwhelming majority of India’s labour force.
• Not only is that neglect seen to be true of the current series as well, but the contribution of the organised sector in this series is seen as inflated because of the use of a data source for manufacturing that exaggerates its performance.

Skewed expansion

The skewed expansion underlying GDP growth is reflected in the sectoral breakdown of that growth. Despite the government’s “Make in India” efforts, growth in gross value added (GVA) at constant price in the manufacturing sector, which is being favoured with huge subsidies delivered under the production-linked incentive scheme (PLI), has fallen from 11.1 per cent in 2021-22 to 1.3 per cent in 2022-23. Financial, Real Estate, and Professional Services that are seen by many as India’s principal growth drivers, recorded only a small improvement in growth from 4.7 per cent to 7.1 per cent.

If despite this the decline in overall growth in 2022-23 relative to the post-pandemic “bounce back” year 2021-22 is not too sharp, it is because of resilience in two sectors. One is Agriculture (including forestry and fishing), which despite being neglected by policymakers and denied the benefits promised in the settlement that followed the prolonged farmers’ agitation, recorded a growth of 4 per cent in 2022-23 compared with 3.5 per cent in 2021-22. Besides a favourable monsoon, this was the result of the farming community staying in production for returns and earnings that barons in Indian manufacturing and services would walk away from.

The other sectors that displayed resilience were trade, hotels, transport, and communications. These sectors, along with construction, have been the sink for unemployed workers unable to find work in commodity producing sectors such as agriculture and manufacturing. In a country with almost no social security provision for a majority of its workers, they cannot but crowd into sectors that offer some income support, even if in jobs characterised by low wages and poor conditions. With construction too showing signs of losing momentum, trade and low-end eateries are important sources of such support, with the gig economy too now riding on this cheap workforce.

There is no cause for celebration here. There is much that the GDP growth estimates, that serve as fuel for the government’s propaganda machine, conceal. The hype surrounding them, in turn, serves to conceal the many failures of economic policy-making in India.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.