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Wednesday, June 29, 2022

Unusual times, usual ways

Methods to use GDP estimates cannot account for the shock caused by demonetisation.

Written by Arun Kumar |
Updated: March 9, 2017 12:06:45 am
 GDP, GDP growth, demonetisation, budget demonetisation, india budget, indian economy, IMF demonetisation, GDP data. unorganised sector, post demonetisation growth, business news Representational Photo.

The latest official data on GDP growth has shown that the economy grew at 7 per cent in the quarter ending December 2016. It belies the argument that the economy was hit hard by demonetisation. But this data is not surprising given that the budget for 2017-2018 assumed that the economy will grow at 11.75 per cent. The government has also not changed the assumption of an 11 per cent growth rate for the current year (2016-17) in the budget. So, the budget assumed that demonetisation had no impact on the economy. The budget figures were provided by the CSO. It was unlikely that the organisation would provide drastically different figures for the GDP estimate.

A GDP figure of less than 7 per cent would have implied that the budget figures for both 2016-17 and 2017-18 are wrong. That would have meant that all the budgetary calculations are incorrect and created turmoil in the economy. Admitting lower growth would have adversely impacted the stock markets, the international sentiment about India and the business environment in general. The data just released shows that investment has taken a hit of about 3 per cent. More bad news would have made the post-demonetisation recovery even more difficult.

The growth projected by the OECD is almost the same as the official figure. The IMF had earlier said that demonetisation will have a marginal impact and suggested that the recovery would be fast. But it needs to be remembered that neither the IMF, nor the OECD collect independent data; they rely on figures provided by the Government of India.

Predicting GDP growth is no mean task. Data has to be generated from a number of sectors and sub-sectors. Each sub-sector has its own method for collecting data and calculating the growth rate. The methodology is time-tested and, therefore, not questioned by analysts. Moreover, the actual data comes after a time lag which means that only estimates can be made and these are periodically revised. But is it right to apply the methodology that is used in normal times when the economy has experienced a big shock? Surveys by manufacturers, business associations and others indicate that over the last four months, employment, production and investment have been hit hard in several sectors.

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The Indian economy is heterogeneous; that makes estimating growth difficult. The unorganised sector produces 45 per cent of the output and employs 94 per cent of the work force. Agriculture is its largest component in terms of employment. Data from the non-agriculture unorganised sector is not available for making predictions. This component was the hardest hit. How then were estimates drawn for this sector?

The document Methodology For Estimating Quarterly GDP says, “The production approach used for compiling the QGVA estimates is broadly on the benchmark-indicator method”. The document adds, “A key indicator or a set of key indicators for which data in volume or quantity terms is available on quarterly basis are used to the value of output/value added estimates of the previous year”; it says, “In general terms, quarterly estimates of Gross Value Added (GVA) are extrapolations of annual series of GVA.” All these point to the use of the “benchmark-indicator” and extrapolation of “the value of output/value added estimates of the previous year”. But when the economy is severely affected, can the benchmark indicators be the same as earlier years and how can the projection from the previous year be valid? Can even projection from before November 2016 be valid post-demonetisation?

It is well-known that the unorganised sector works largely on cash and was severely dented by demonetisation. The organised sector was less impacted. Thus, the proportion of the activity in the organised and unorganised sectors changed dramatically due to demonetisation. The government’s press note announcing the growth figures says, “GVA from quasi corporate and unorganised segment has been estimated using IIP (Index of Industrial Production) of manufacturing”. The IIP reflects the growth of the organised sector. Can it help estimate the unorganised sector production in the changed circumstances?

It is stated that this index is the key indicator for calculating unorganised manufacturing sector activity. A similar methodology was adopted in other sub-sectors of the economy. But in the post-demonetisation regime when the growth of the organised and unorganised sectors diverged dramatically, the method is not useful in calculating the unorganised sector’s contribution to the GDP. A sub-sector that is clearly declining is taken to be growing at the same rate as the organised sector.

The press note adds, “IIP from manufacturing sector registered a growth rate of (-) 0.5 per cent during April-December 2016-17”. Intriguingly, in spite of this, it is said that the manufacturing sector grew at 7.7 per cent. Once the organised sector’s growth is overstated and an incorrect indicator is used for estimating the unorganised sector growth, the economy can be shown to be growing at 7 per cent. But, is it?

Some argue that the undeclared output in the organised sector, used to generate black incomes, has now been declared. If this is correct, the methodology for estimating the unorganised sector’s contribution becomes even more flawed. Some argue that there was extra consumption with old notes in November. But the reports in that month described lack of footfalls in shops and malls and decline in wholesale trade and truck movements.

There is an urgent need for the government to explain the use of the unchanged methodology in the drastically changed circumstances post-November 2016. Yes, the CSO cannot change the method on its own, but in unusual times should unusual steps not be taken? Should a rider not be put on the data? The head of the statistical department has been arguing that the impact of demonetisation on the economy will have to be studied over time and a lot more data is needed. However, should the government put out figures which they feel cannot be calculated at present and, therefore, are premature? The point is the economy (and the budget) is not governed by official data but by what is happening on the ground.

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The writer is a retired professor of economics, Jawaharlal Nehru University. His latest book is ‘Understanding the Black Economy and Black Money: An Enquiry into Causes, Consequences and Remedies’

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