Only a few days ago at the end of February 2026, the government has come out with methodological revision, purportedly to address the issue of misestimation, but the million dollar question is: Can it do so?

The question is important because methodological problems introduced in 2015 series caused growth over the past two decades to be misestimated in both directions. Broadly, they caused growth for 2005-11 to be underestimated by about 1-1.5 percentage points in the backcasting exercise; and caused subsequent growth to be overestimated by about 1.5-2 percentage points.

A working paper titled "India's 20 Years of GDP Misestimation: New Evidence" just published by Peterson Institute for International Economics, Washington DC, has found that India overestimated its GDP growth between 2012 and 2023 by about 1.5 to 2 percentage points, while it may have underestimated in the preceding period of boom years between 2005 and 2011 by about 1 to 1.5 per cent. Once these adjustments are made, it appears that the Indian economy did not grow at a stable rate over the past two decades, but rather boomed during the early 2000s, and then decelerated after the global financial crisis of 2008 and subsequent domestic shocks.

Authors of the paper – Abhishek Anand, Josh Felman, and Arvind Subramanian – have said that the versions of this paper were presented at Cornell University, Harvard University, the Indira Gandhi Institute of Development Research, and the Peterson Institute for International Economics, and the International Monetary Fund.

The paper said that the misestimation problem can be traced to two methodological issues. The first is that the formal sector has been used as a proxy for the vast informal sector, even though unorganized enterprises were disproportionately hit after2015 by demonetization, the introduction of the goods and services tax, and the COVID-19 pandemic. The second is that deflators for many sectors have been based on commodity prices, which have moved sharply in relative terms.

At the end of February 2026, following an extensive consultative process, the Indian government introduced a revised GDP. One purpose was to update the weights of the various goods and services, a step that was long overdue since India's economy has gone through tremendous changes since the weights were last established in2011-12. Another purpose-perhaps an even more important one-was to address methodological shortcomings that had been identified by academics and statisticians.

For much of the past decade, experts had raised questions about the methodology used to estimate GDP. These doubts spread to a wider public in 2016, when the demonetization and withdrawal of 86 percent of the country's currency apparently caused real GDP growth to accelerate to an eye-popping annual rate of 8.3 percent. They resurfaced in 2019, when a credit crunch caused by a crisis in India's nonbank financial institutions apparently caused only a minor blip in growth. Then, in June 2025, with private investment and job creation weak but GDP apparently booming, two former officials from the statistical agency expressed concern that "something does not add up". Around the same time, the International Monetary Fund gave India's GDP methodology a mere C grade.

This paper revisits these debates, in order to: (a) reassess the trajectory of the world's fifth-largest economy during a critical period in its development and (b) provide a benchmark for evaluating the 2026 changes to GDP methodology. It does not assess the quality of the new numbers, something that can be done only with time. But it does provide re-estimated historical growth rates that could be used as a reference when the new methodology is used to produce a GDP back series.

The issue is important because if the misestimation is large enough to convey a false sense of how well the economy is doing, serious problems arise, the paper says, emphasizing, If the GDP numbers suggest that growth is strong when it is actually weak, businesses are liable to misinvest, households to overspend, and the central bank to maintain an excessively tight monetary policy. Inaccurate numbers also make it difficult for the government to calibrate its fiscal or reform policies, as it cannot respond to problems it cannot see. For all these reasons, getting GDP growth right is critically important.

The paper has noted that a new GDP methodology was introduced in January 2015, initially to the post 2011-12 numbers and later to the historical series. The paper finds that after the 2015 methodology was introduced, correlations between GDP and key indicators that span sectors-exports, credit, taxes, electricity consumption, sales, and the index of industrial production-broke down or weakened. In India, growth has sometimes been evident nowhere but in the GDP statistics-and occasionally everywhere but in the GDP statistics.

Why did this misestimation occur? The January 2015 methodology had two main problems: inappropriate data sources and inappropriate deflators. A large share of Gross Value Added (GVA) emanating from the informal sector was based on data from the formal sector, and a large share of GVA was deflated by indices that were driven not by the prices of the goods and services involved but rather by commodity prices, particularly oil prices.

To be clear, the main problem with the 2015 series was not the absence of double deflation, as is often alleged. In fact, this was a relatively minor problem. The real problem was the use of inappropriate deflators and inappropriate indicators.

The paper said, "We estimate that from 2011 to 2023, the economy actually grew at 4-4½ percent on average instead of the 6 percent reported. … We find that the post-2011 overestimation occurred because the triple shocks of demonetization, introduction of the Goods and Services Tax (GST), and the Covid-19 pandemic caused the performance of the informal sector to diverge sharply from that of the formal sector, while the fall in oil prices inappropriately pulled down the GDP deflator. As a result, the real increases in output were significantly overestimated."

The GDP numbers and macro indicators reveal a striking contrast. According to the GDP numbers, the economy has enjoyed steady, rapid ascent over the past two decades, with growth easing only modestly from an annual average of 6.9 percent in 2004-11 to around 6.1 percent in 2012-24. But the macro indicators tell a very different story. Almost every indicator posted double-digit growth (annual average) in the first period and collapsed in the second. Real credit growth fell from 15.6 percent to 5.6 percent a year. Real exports fell from 13.9 percent to 5.4 percent a year. The IIP plummeted from 16.1 percent to 2.9 percent a year. Direct tax revenues slumped from 13.0 percent to 7.0 percent a year.

Is the divergence between the indicators and the GDP numbers somehow related to the change in the GDP methodology? The paper delved deep into the question and observed that consistent pattern emerged. The correlation is strong for the 1995-2011 period, when GDP numbers are based on the "old" methodology, and breaks down or weakens when the 2015 methodology is adopted.

This misreading of India's performance has had two important policy consequences. First, it has complicated the task of calibrating macroeconomic policy to the actual condition of the economy. During some periods, the GDP data signalled that the economy was strong when it was in fact weak; in others, they suggested that policy should be eased when growth was in fact strong.

The other problem that misestimation has created is to attenuate the urgency of reforms. After all, why should one change the policy framework when it is already producing world-beating growth?

"We will have to wait and see if the latest methodological changes are the light that will allow India's national income accounts estimation, undertaken after commendable consultation, to move beyond the fog of the last two decades," the paper said. (IPA Service)

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