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Monday, August 15, 2022

Real growth vs spurious criticism

The Central Statistical Office has never resorted to deception, nor is it doing so now.

Written by Bibek Debroy
Updated: June 23, 2016 12:02:20 am
gdp, india gdp, gdp growth, india gdp growth, india gdp numbers, latest gdp india, indian economy, GVA, income tax, economy, india growth, arun jaitley, news, business news, inflation, india news Note that national income accounting is done at current or nominal prices, and then deflated to get the constant or real numbers. (Source: Express file photo)

The new series of national accounts was introduced in January 2015. The switch wasn’t overnight and impromptu — it had been contemplated since 2008. There were several sub-committees, chaired by people such as K. Sundaram, S. Mahendra Dev, B. N. Goldar, A. C. Kulshreshtha and A. K. Adhikari. In national income accounting, these gentlemen (there is no lady in the list) possess considerable expertise and are known and respected names. Subject to the constraints on data availability, a problem incapable of instant coffee-like resolution, this switch was approved and recommended by them. But no matter. It is a sign of how important the economy has become that every person is obsessed with the GDP numbers and has become an expert on national income accounting. This is no different from every person, even if he/she has never touched a bat or a ball in his/her life, pretending to know better than M.S. Dhoni or Virat Kohli. Therefore, despite this being a newspaper, one is entitled to write: GDP = GVA + taxes – subsidies. (GDP means gross domestic product and GVA means gross value added). The GVA is defined as the value of output minus intermediate consumption (value of inputs). Note that national income accounting is done at current or nominal prices, and then deflated to get the constant or real numbers.

In those current prices, the Central Statistical Office told us the GDP increased by 10.8 per cent in 2014-15 and 8.7 per cent in 2015-16. Had there been a clamour for “reforms”, so that growth is higher, I would have understood. But no, there is a clamour that these numbers smell like the fish sold by Unhygienix. The evidence given is of dipstick variety. “Over dinner, I spoke to 10 industrialists and none of them say their value of production has increased.” First, even if the value of production hasn’t increased, the GDP can increase if taxes increase and/or if subsidies decline. Second, even if the value of production hasn’t increased, the GVA and GDP can increase if the value of inputs declines. If one has imbibed that identity, and many critics evidently haven’t, this is simple logic. If one points a finger on the basis of the value of production alone, one needs a crash course in national income accounting. Third, those 10 “industrialists” lead to a warped view. Simplifying a bit, under the old series production data was from the annual survey of industries. Simplifying a bit again, under the new series it comes from the ministry of corporate affairs database. The new database is broader, covers services better and includes smaller enterprises. Looking only towards large “industrialists” or “manufacturers” is a bit like wearing an eye-patch.

No one denies the expenditure approach is unsatisfactory, more so if one uses quarterly, rather than annual numbers. There too, there is an identity and there too, one needs to take off the eye-patch. Low growth in exports can be more than neutralised by low growth in imports. Low growth in government final consumption expenditure can be more than neutralised by the high growth in private final consumption expenditure. There are several components in the identity and focusing on just one, while forgetting the others, is what logic calls a fallacy of composition, or applying the part to the whole.

Let’s now move to the evidence of the slapstick variety. I spoke to 10 individuals and they don’t think their income grew by 8.7 per cent. They don’t feel good. Other than the limited nature of such sampling, this is subject to what economists call “money illusion”. Most individuals suffer from the myopia of thinking in nominal terms, rather than in real terms. Though initially computed in current prices or nominal terms, the GDP numbers are then reduced to constant prices or real terms. Thus, the real growth was 7.2 per cent in 2014-15 and 7.6 per cent in 2015-16. In 2015-16, the differential between nominal and real was 1.1 per cent, a measure of inflation. Do you feel better with 8.7 per cent nominal growth and 1.1 per cent inflation, or do you feel better with 12.6 per cent nominal growth and 5 per cent inflation? Most individuals opt for the latter and that’s the problem with feelers — money illusion.

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Does this mean all is well? No, there are issues with the GDP deflator, the inflation indicator, used to move from the nominal GDP estimate to the real one. I don’t think we will solve this until we have a proper producer price index (PPI). A few critics have constructed their own GDP deflators (other combinations of the WPI, CPI and other weights). But these aren’t superior to what the CSO does, not until we solve the data constraints. Also, the question mark is about the real, not nominal, growth. There have always been data issues. But since its establishment in 1951, I don’t think the CSO has ever willfully resorted to statistical legerdemain. Nor has it now. To suggest otherwise, one needs to presume this grand design of jugglery started circa 2008. This entire episode reminds me of a debate between Bertrand Russell and one of the followers of Archbishop James Ussher, who computed that the world had been created in 4004 BC. When Russell mentioned fossils, the follower retorted that these had been placed in the world to test our faith. There is no logical way to refute this argument. Similarly, one can respond to specific criticism and the only valid one is on the deflator, spliced with the argument about higher growth being desirable. However, if there are generalised assertions about the CSO’s skulduggery, that’s the realm of faith and there is no logical way to refute that.

The writer is member, Niti Aayog. Views are personal

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First published on: 23-06-2016 at 12:02:18 am
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