Underestimating Economic Growth

The GDP growth estimate for India in 2009-10 was initially 7.7% but later revised to 8% and finally to 8.4%. The 2010-11 GDP growth was revised from an initial 8.4% to a final 9.3%. Why did this happen? The principal reason was the wide, continuing divergence between trends in the index of industrial production (IIP) and trends revealed by the Annual Survey of Industries (ASI).

The IIP is based mainly on data gathered from large companies, and provides a quick estimate of how things are going. This is the indicator the government relies on for early estimates of industrial and GDP growth. By contrast, the ASI takes time, covers all units employing more than 10 workers using power or 20 workers without electricity. This means it covers the bulk of — though by no means all — small and medium industries. It provides data on value addition, whereas the IIP refers only to production. ASI data comes with a lag of up to two years. This fuller picture is then used to finally revise estimates of GDP and industrial growth.  Read more of this post