“I am puzzled by the new GDP growth numbers. This is mystifying because these numbers, especially the acceleration, are at odds with other features of the macro economy. Import of goods declined. typically growth booms are accompanied by surges in imports not declines… similarly, real gross capital formation declined”. This was the chief economic advisor (CEA) Arvind Subramanian in an interview to the Business Standard on February 3, 2015. Lest you be fooled into believing that the CEA was being intellectually honest about the state of the current economy, he was actually talking about the revised GDP number for the year 2013-14, when UPA 2 was in power.
After the new GDP series was rolled out under the current government, it revealed that India’s GDP growth in 2013-14 was 6.9 per cent compared to the reported 5 per cent, as per the old methodology. A 6.9 per cent GDP growth in 2013-14 would have meant that India was the second fastest growing large economy in the world, after China. But the CEA expressed bewilderment at that number because he said this was in dissonance with the actual macro-economic reality. He explained meticulously how other economic parameters such as imports, gross capital formation etc are truer indicators of GDP growth and dismissed the view that India’s GDP could have grown as fast in 2013-14.
Fast forward to September 2016. India’s imports have fallen for 20 straight months. In April 2016, India’s imports touched a six-year low. Exports are still at 2011 levels, down significantly from the 2013 peak. Industrial production which creates real jobs in the economy is actually shrinking. Gross fixed capital formation has fallen. What does the same CEA have to say this time about the same macro-economic indicators — “It signals improvement in underlying real economy, holds out hope for the corporate sector”.
In a poorly disguised attempt at face-saving, the CEA has waxed eloquent about how most commentators have misinterpreted the latest GDP numbers showing 7.1 per cent growth, driven almost entirely by government spending (IE, September 8). He says “Nearly all commentary has focused on decline in constant price GVA and GDP. But real story lies in nominal magnitudes”. This is the first time that we are being asked to judge the economy’s health by nominal GDP and not real GDP, that is GDP adjusted for inflation. In a hair-splitting effort, he argues we should focus on nominal growth, then argues that the nominal growth should not be assumed to be solely due to increase in prices but also an increase in quantity but does not explain if that was the case, then why not just use real growth directly.
Instead, he makes a convoluted point about corporate revenues growing faster than interest costs which could boost the currently anemic credit growth, going forward. He then lays out a string of conditions — if monsoons boost agriculture growth, if falling exports have bottomed out, if the construction sector can perk up due to “reforms” — then we can be cautiously optimistic about GDP growth.
Technical mumbo-jumbo and caveats aside, he essentially surmises that we should be ecstatic that nominal GDP growth is now in double digits. One really had to scrape the bottom of the barrel if one had to go back to the basics of nominal and real GDP growth and take solace in a nominal double-digit growth, albeit with cute quotes about “nominal being real” and “real being nominal”, this time.
All this hiding behind economic theory misses the simple point — using exactly the same yardstick that the same CEA applied in passing judgment about India’s 2013-14 GDP growth calculated under the same methodology. India’s current state of the economy is in utter disarray. While we all endorse the Bernard Shaw quip that “if all economists were laid end to end, they would never reach a conclusion”, this one is about the same economist in the same position reading the same set of numbers but taking two diametrically opposite views. If the CEA had a well-argued position on his reservations about India’s 2013-14 GDP growth, then how can he be optimistic about the state of the current economy using exactly the same macro-economic parameters?
We have been repeatedly witness to this dangerous trait of the current government and its inhabitants becoming delusional with their own rhetoric. We saw that with the government’s claim of savings of Rs 15,000 crore in the LPG subsidy scheme due to Aadhaar based Direct Benefits Transfer (DBT), which, again, the CEA endorsed healthily through similar articles in the English press. It turned out, as the CAG pointed out last month, that a meagre Rs 1,764 crore (approximately 10 per cent) of the subsidy savings was due to DBT and the remaining 90 per cent of the savings was due to the fall in global oil prices. The government and its CEA were simply disingenuous and resorted to such misleading claims to falsely justify their decision to table the Aadhaar bill as a money bill and pummel it through Parliament. The current claims of the CEA about the health of the economy are similarly misleading.
I have known Arvind Subramanian to be a fine and fearless economist for almost three decades. I have myself tried in the past to lure him back but the timing was not ripe for him. He has never been an apologist for anything dubious. My piece of unsolicited advice to him: Spin is a powerful tool in both cricket and politics but not in economics. Leave it to those who have made a brilliant career out of it — such as his senior minister.