Only in India, or so the Central Statistical Organization (CSO) would have us believe. Just yesterday we thought that India’s GDP grew at 5.1 per cent for the year 2000-01; but today we are made to believe that the growth rate was twenty per cent less or only 4 percent per annum – the slowest growth rate in 21 years, excluding the 3 per cent recorded in 1982-83, 3.8 percent in the drought year of 1987-88, and 1.6 percent recorded in the crisis year of 1991-92. Is this possible?

Note that the year in question is not the world recession year of 2001-02, but the previous year, a year when the world economy recorded it's highest growth rate in fifty years. Note also that GDP growth is not one amongst many numbers; it is the number, signifying the economy's health, its aspirations, and investment possibilities. It is a number looked at by all concerned, both here and abroad. Which is all the more surprising that the CSO released this estimate without vetting it's not so improved methodology.

If they had done so, they would have realized that their calculations were grossly in error, especially with regard to the "banking and insurance" sector; that this error, if corrected, would have led them to conclude that GDP growth in 2000-01 was 5.4 percent, not 4 percent. Further, that there is an underestimate of about 1.5 percent in the growth rate of the trade sector. Overall, therefore, that the "correct" estimate of GDP growth is likely to be around 5.6 percent, rather than 4 percent.

Let us examine GDP growth by the three major sectors -agriculture, industry, and services. India's agricultural sector, which accounts for approximately 25 percent of GDP, did not grow at all; indeed, a negative growth of -0.2 percent was recorded. This suggests that perhaps the CSO 4 percent estimate is realistic. Industry grew at 6.1 percent, thereby causing half the economy to grow at 3 percent. Services growth was estimated at 4.9 percent, the third lowest in the last twenty one years.

Do these estimates pass the "smell" test? There is little value-added that arm-chair economists can offer the CSO on their estimates of GDP in agriculture and industry. The methods to estimate GDP in these sectors are well known, and well-tried. But services is another story, made even more exciting by the latest CSO foray into the unknown.

Number crunchers at CSO tell us little about the reasons for the low growth rate of services, but indications are that this was due to "trouble" in the banking sector. The problems were so severe that the banking and insurance sector recorded a negative nominal and real growth rate of minus 2.1 percent i.e. price increases have been estimated by CSO to be zero. If calculations of the GDP originating in the banking sector are done according to good international standards rather than Enron accounting principles, nominal growth of the banking sector would be, conservatively, around 18 percent. Inflation in this sector has likely been negative, around -3 percent, and not zero as CSO has assumed. A conservative estimate of real banking sector growth in 2000-01 would therefore be 18 percent, under the assumption that inflation is as assumed by the CSO i.e. zero. (Note that the nominal banking sector growth has been estimated by CSO to be 21 .7 percent in the previous year, 1999-2000). This 18 percent banking sector growth translates into overall GDP growth of 5.4 percent. Is this possible?

It is well understood that measurement of GDP originating in the services sector is problematic. And it is well known, and painful, that if you pay a bureaucrat higher wages, the GDP will go up by an equivalent amount; painful because the babu adds negative value by obstructing the work of ordinary citizens, but GDP accounts show positive value-added. The banking sector has both profits and wages, so a naïve method of constructing GDP would be to add up wages and profits - something the CSO may have done (the method has not been made transparent). A moment's reflection would show that this "method" is incorrect, particularly in the computation of profits. Think about it - if interest rates go down, and large profits are made in the holdings of government securities, the GDP does not go up. If it did, the US would be showing record GDP growth in an otherwise recession year!

The conventional method, as practiced in the most advanced banking economy in the world (the USA), is to estimate banking sector value-added through the charge for banking services. Since there are several such "services" for which there is no explicit charge, the procedure is to estimate the aggregate charge for both explicit and implicit services; and this is measured simply as the difference in the interest rate received on lendings of deposits minus the interest paid to depositors. The spread in 2000-01 did not decline with respect to 1999-2000; both lending rates and deposit rates declined by an average of about 0.50 percent. So estimating growth in value-added is reduced to estimating growth in aggregate deposits. These deposits grew at 18.4 percent (vs. 13.9 percent in the previous year!) Other banking indicators (e.g. non-food credit growth ) also show a larger growth in 2000-01: 15.3 percent compared to 12.2 percent. Yet the banking sector shows a real growth of -2.2 percent in 2000-01 compared to a 10 plus real growth in the previous year!

While several of us lament the inefficiency and wastage of the banking sector, it is a fact that the efficiency has not worsened i.e. the "price" of banking services has probably declined. A worst case scenario is one of zero inflation. Which means that banking sector GDP increased from 80,000 crores (1993-94 prices) in 1999-2000 to 94,400 crores in 2000-01. Which means that overall GDP was higher by 16,200 crores or 1210,000 thousand crores, compared to 1148,500 thousand crores in the previous year. Which means that aggregate GDP growth was 5.4 percent in 2000-01 and most emphatically not 4 percent as indicated by the government.

There also seems to be a problem with the "trade" sector, a sector which accounts for almost 14 percent of GDP. Growth for 2000-01 for this sector is estimated by CSO to be only 3.5 percent, the second lowest growth rate in the last twenty years - the crisis year of 1991-92 is lower at 0.6 percent. Value-added in this sector is also not straightforward. An estimate based on the historical relationship between trade and GDP of agriculture and industry indicates that real growth of this sector was at least 5.1 percent in 2000-01 - a number that would still be among the lowest in twenty years. If this correction is added, GDP growth in India for 2000-01 was 5.6 percent - still far below are potential (we always will be with real interest rates of 8 percent plus) but closer to reality than the CSO's Ripley figures.