When you get the chills and feel feverish, do you immediately reach for your thermometer and break it — lest it may tell you how bad your fever is and how fast it is rising?
I suspect not, because you know the thermometer will just map your true body temperature — not raise it. Moreover, unless you know how bad it is, how would you decide what to do next?
Like all analogies, this one too is imperfect, but it is quite instructive and I first heard of it from Manish Sabharwal of TeamLease Services Ltd during a chat with him on the nationwide lockdown in the last week of March.
With reference to the various regulatory exemptions and moratoriums provided by the government, he had said they were akin to “breaking the thermometer”.
So while, for instance, it is true that not having to pay back a loan for the next six months (on the borrower’s side) and not marking down that loan account as a non-performing asset (on the lender’s side) helps both parties survive the Covid-induced lockdown, it also leaves the accountants of the economy — those who estimate the GDP — scratching their heads. Same holds for the extensions given to companies in filing their quarterly financial statements.
Many of these so-called “regulatory forbearances” were announced by the government and the RBI towards the end of March and start of April.
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In the absence of much actual data, quarterly GDP estimates were based on more assumptions than ordinarily used. And this opened up the possibility of GDP estimates being inaccurate — much like touching one’s forehead is as against using an actual thermometer.
Former Chief Statistician of India, Pronab Sen, has gone on record to say that in the fourth quarter (January to March) of the last financial year, the GDP is likely overestimated by as much as Rs 2 lakh crore — that’s 1 per cent of India’s annual GDP.
Data released by Ministry of Statistics and Programme Implementation (MoSPI) surprised most economists and forecasters — some more than others. For instance, Anubhuti Sahay of StanChart expected Q4 GDP to grow at “minus” 1.5% — that’s a contraction by 1.5%. Other were more sanguine but most estimates suggested a growth rate of just 1% to 2% in Q4.
The Q4 growth rate of 3.1%, as released in the provisional estimates on Friday, bamboozled most and Sen is not the only one predicting future downward revisions.
Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India, alluded to the government extending “statutory timelines for submitting the requisite financial returns” as one of the reasons why “there would be significant revisions in both Quarterly as well as Annual numbers in August when the Q1FY21 data is released”.
Sonal Verma of Nomura Research also said “we believe these (existing deceleration in GDP growth from one quarter to another) are also underestimated and will likely undergo downward revisions as lockdowns have disrupted data flow from entities”.
In short, this lack of robustness and credibility in macroeconomic data is one of the (side-)effects of the extensive regulatory forbearance provided in the wake of Covid-19 disruption.
But this is not the first time that allegations of GDP overestimation have come up. If it was only a temporary issue, perhaps one could overlook it. But that isn’t the case.
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India’s national income accounts have suffered a lot of fluctuations in the recent past. As Ghosh writes, with an obvious tinge of exasperation, “We would like CSO (Central Statistics Office) to come out with a methodological note explaining the reasons of why the data has become so volatile in last 2-3 years? Is it because the economy is undergoing a structural change that CSO is not able to capture? These are questions that CSO can only provide an answer”.
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India’s national income accounting has come in for sharp criticism in the past few years — some even suggesting that its credibility is going the China way. Data credibility needs to be restored, and soon. This is as critical for an economy that wants to grow as is an accurate reading of temperature for a person wanting to get better.
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