The takedown that isn’t

Yashwant Sinha criticised the present government’s economic management. Surjit Bhalla responded with ‘facts’. His ‘facts’ demand a response from another economist.

Written by Pronab Sen | Updated: October 11, 2017 8:18 am
Indian economy, Yashwant Sinha, Arun jaitley, yashwant sinha on Indian economy, yashwant sinha on demonetisation, India GDP growth, yashwant sinha finance minister, arun jaitley on GST, gst, demonetisation, GST slabs, GST rates, narendra modi, inflation rate india, Chidambaram, BJP, Congress, pm modi, economy, demonetisation, bjp, india news, indian express news By and large, India’s GDP measure estimates value-added in the non-corporate sector from its data on the corporates. (Illustration: C R Sasikumar)

In a hard-hitting article, ‘I need to speak up now’ (IE, September 27), Yashwant Sinha, former finance minister, trashed the present government’s track record on economic management in no uncertain terms. Coming from a senior and highly respected BJP member, it has expectedly set the cat among the pigeons. Spin machines on both sides of the political divide have been hyper-active in either taking advantage, or doing damage control, as the case may be.

In ‘Data vs gossip: Who should win?’ (IE, September 30), Surjit S. Bhalla, newly anointed member of the Economic Advisory Council to the prime minister, takes on Sinha with a point-by-point take-down, supposedly on the basis of facts. I hold no brief for Sinha, but Bhalla’s “facts” demand a response from another economist.

Bhalla, of his own volition, attributes Sinha’s statement — “according to the old method of calculation, the (GDP) growth rate of 5.7 per cent is actually 3.7 per cent or less” — to refer to the estimation of industrial growth using corporate data, and triumphantly proclaims that since the Index of Industrial Production (IIP), which was earlier used to measure GDP growth of industry, is 1.9 per cent as compared to the actual estimate of industrial GDP growth of 1.6 per cent, the CSO has under-estimated the growth and not over-estimated it.

From a former member of the National Statistical Commission, such a statement is inexcusable. Bhalla should remember that the IIP growth figure was never simple-mindedly applied to derive the growth rate of the sector. This was done by applying IIP growth rates at the “compilation category” level and then re-aggregating. The resulting growth rate usually is very different from the over-all IIP figure.

More importantly, what makes Bhalla think that Sinha was referring only to the industrial sector? Corporate data is now used for a number of sectors including various services. Apparently, Sinha believes that the non-corporate sector has performed much worse than the corporate, because of demonetisation/GST, and this difference is not getting reflected in the GDP estimates. What he perhaps should have said is: “Taking into account the performance of the non-corporate sector….”. Sinha may be forgiven for this lapse in terminology since he is not an economist.

However, Bhalla is quite right in stating that there is “no evidence on the damage done by demonetisation”. Of course, there is no hard evidence, because we have no way of measuring the value-added in the non-corporate sector on a quarterly basis, except in agriculture. By and large, India’s GDP measure estimates value-added in the non-corporate sector from its data on the corporates. But, scientifically speaking, lack of data allows one to only disagree, not to refute. Is Bhalla willing to publicly state that he believes that the non-corporate sector is doing at least as well as the corporate?

He doesn’t quite do that, but he does the next best thing — first, provides indirect evidence; and second, provides an alternative reason for the slowdown. As far as the first is concerned, he uses rural real wage rates of ploughmen and carpenters to argue that there is no fall in labour demand in the country post-demonetisation. This argument has been conclusively demolished by Himanshu (‘Face the decline’, IE, October 6) on grounds of cherry-picking.

Let me take up the second. He agrees that the slowdown is “a self-inflicted …wound” resulting from “the exorbitantly high real interest rate policy followed by the MPC”. This is clever since it simultaneously absolves demonetisation/GST from blame, and shifts the responsibility from the government to the RBI. The “evidence” he provides is on increase in real interest rates during this government’s tenure compared to: (a) Sinha’s tenure as finance minister; and (b) major emerging markets. How either of these is relevant eludes me.

Interest rates can be deemed “exorbitantly high” only in comparison to some conceptually accepted benchmark. There are only two in existence: (a) the social rate of time preference; and (b) the long-run neutral real rate of interest. The first is a political call on how much a society values current consumption over future consumption. In poor countries like India, this rate should be high. The last time this was articulated was by the Planning Commission at 4 per cent, and we have not become so much richer that it would have declined significantly.

The second is defined as the rate at which the economy grows at its long-run potential with stable inflation. This is hard to estimate, but in developed countries it ranges between 1.5 to 2.5 per cent. In a country like India, which has high underemployment and low current productivity, the rate should be much higher, possibly upwards of 4 per cent. The real repo rate has been below these benchmarks except for a few isolated months (it is currently at 2.7 per cent) and so has the 10-year T-bill yield (3.4 per cent). So I really do not know what he is talking about.

Bhalla “… wishes and hopes that the opinionatti would use a minimum of evidence in their expert commentary on the Indian economy.” Sadly, that is exactly what he does — use a minimum of evidence.

The writer is former chairman, National Statistical Commission, and principal economic adviser, Planning Commission.
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