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Currently, a divergence is observed between the aggregate of gross state domestic products (GSDPs) and the gross domestic product (GDP) of India. Though a thorough exercise is required to find out the reason, this difference has public policy implications for the country.

The divergence between the recorded output of Indias constituent states put together and the national output, which is taken to signify the size of the economy, gives rise to doubt if the GDP numbers put out by the Central Statistics Office (CSO) accurately capture the countrys economic growth. This divergence, if found true, could complicate assessments of the outcomes of various policy measures.

In 2019-20, as per available official data, Indias 20 states and Union territories (UTs) combined recorded growth of 6.9%, compared to national-level GDP growth of 4.2%. There have been reasonable differences between the two numbers in the past, and after the introduction the 2012 series of the National Accounts Statistics (NAS), this difference averaged 0.3 percentage points over fiscal years 2012-13 through 2018-19. The added-up GSDP growth of states/UTs has been consistently higher than that of national GDP during the last five years. But the growth difference of 2.7 percentage points in 2019-20 is not only abnormally high, it also suggests that the deceleration of growth at the sub-national level was not as sharp as the national number may suggest.

In India, states release only annual data of their GSDP and not quarterly data. Also, they do not provide GSDP figures with a break-down of consumption and investment. However, in their annual GSDP sectoral estimates, not only do they follow the same methodology of data compilation used by the National Statistical Agency (NSA), but the data is also discussed and vetted by the NSA. The comparable estimates of GSDP for 2015-16 to 2017-18 that the NSA prepared for the Finance Commission indicate that states estimates were quite consistent with these; specifically for 21 states, the ratio of one to the other varied between 0.99 and 1.01. Even the average annual growth at current prices of the NSAs comparable GSDP for 2015-16 to 2017-18 at 12% was a just a shade lower than 12.4% for the aggregated GSDP as compiled by the states themselves. This suggests that state estimates did not suffer from any methodological or estimation flaws. Further, the aggregated GSDP of states/UTs was also aligned with national GDP in 2011-12, the first year of the new NAS series, with the ratio of aggregated GSDP of sub-national constituents being 1.012. Aggregated GSDP growth after that was expected to show a similar growth trajectory. The gap of 2019-20, however, raises a question: Is there an emerging disconnect?

Before we look at the implications and ways of resolving it, it is important to look at two issues. The ministry of company affairs MCA-21 data for corporate output across all sectors and the data on railways, financial institutions, public administration and defence is allocated by the NSA to various states. Their respective directorates of economics and statistics incorporate that data in their overall compilation of GSDP. Each states share differs, and tends to exceed 60% of total GSDP for most. Hence, differences in GSDP growth can be inferred to arise from only that part of GSDP which is solely in the states domain. Often, discrepancies in GDP estimates (including sharp revisions) get attributed to the informal sector. The overall share in GDP of households and non-profit institutions serving households, which is the informal sector, has been around 45%, and this is almost equally distributed across agriculture, industry and services. Though there are differences in growth across those three broad sectors, industrial growth is significantly more robust from a data perspective.

Some questions arise in this regard. Has the issue of a sharp, persistent and secular deceleration of GDP growth been overplayed? The average annual growth of GSDP of Indias 20 major states/UTs during 2012-13 to 2018-19 was 7.15%. This measure of growth in 2019-20 at 6.89% was only a shade lower than 6.97% achieved in 2018-19, and showed a marginal deceleration from the trend medium-term growth. Seven of these states (six of them major), namely Tamil Nadu, Haryana, West Bengal, Sikkim, Bihar, Madhya Pradesh and Andhra Pradesh recorded higher growth in 2019-20 than the previous year. Could it be that Indian states are making a more accurate assessment of the growth situation on the ground? After all, considerable changes have taken place in the composition of the economy over the last five years, especially in the informal sector.

The methodology of the survey used by states to gather data has the approval of the National Sample Survey Organization (NSSO). The NSSO, however, lacks the expert capacity to supervise these surveys, and this makes data robustness hard to ensure. Should this bottleneck not be eased for us to obtain clarity?

If the states GSDP reflects the situation correctly, has Indias unorganized sector bounced back faster after demonetization (in 2016) and introduction of the goods and services tax (in 2017) than anecdotal data suggests? And if this is so, will it not be prudent to ensure that the sector gets access to capital as part of the countrys stimulus strategy? And finally, will the 15th Finance Commission use GSDP or CSO data in deciding on its devolution of resources to states?

R. Gopalan and Manak C. Singhi are respectively, former secretary in the department of economic affairs, ministry of finance, and former senior adviser at ministry of finance, Government of India.

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An odd divergence between India and its constituents - Mint