GDP estimates, guesstimates, assumptions and the playbook of growth
By Shankkar Aiyar | Published: 08th January 2017 04:00 AM |
The impact of politics and policies on any economy is reflected in the primary indicator, the gross domestic product. Data on GDP reflects the health of the economy and is critical to script the playbook for growth and future plans for development.
On Friday, the government presented the advance estimates for the current financial year. State-owned DD News announced “Govt. pegs #GDP growth at 7.1% in Financial Year 2017”. The use of the phrase “pegs” was apt given the rather inexact nature of the exercise and the circumstances. The advance estimate is both counter-intuitive and challenges credulity in the face of anecdotal experiences following “demonetisation”.
Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced in a given period. Ordinarily, the advance estimates for the year presented around the budget are derived with data pertaining to the April-December period. This year, the Central Statistical Organisation chose to use data only from April to October—that is, roughly about half the year’s data—to project the full year’s picture.
Indeed, notwithstanding the caveat-laden advance estimates optimistic figure, fact is the economy is slowing down.Consider the headline data. GDP is lower, growth in net taxes is slower, private final consumption expenditure is lower, gross fixed capital formation, which reflects investments, is lower and rate of per capita income growth is lower.
At a sectoral level, gross value addition in mining is slower, manufacturing is slower, construction is slower and services—including hotels, trade, transport, communication, finance and real estate—is slower. Barring agriculture and public administration—thanks to a good monsoon and the effect of 7th Pay Commission—all indicators suggest a slowdown.
And this is without factoring the effects of “demonetisation”. The estimate before the government—given by the CSO and the RBI—skirts the reality on the ground. Doubtless, the CSO was faced with a compulsion—the advancing of the dates for the presentation of the Union Budget to February 1 from the earlier February 28 left it with scarcely any option but to extrapolate data. What matters more than the incompleteness of the exercise is whether the data informs policy makers adequately. The crux of the issue is whether the exercise contributes to the process of decision-making or has it been reduced into an item song, an annual ritual.
Mercifully, the government is well informed about two variables critical to the formulation of the Budget for 2017. The flow of revenues, that is both direct and indirect taxes was known and so was the level of government expenditure—fiscal deficit, for instance, was 86 per cent of the budgeted figure in November. But the need for design of policy demands clarity on what is to determine what should be done. The government is faced with a parade of known unknowns post the demonetisation. These range from the state of consumption, which accounts for nearly 60 per cent of the GDP, to the state of small and medium enterprises that employ eight to 10 persons, to how uncertainty of demand is impacting investment decisions.
Then there is the list of exogenous factors—the state of global trade, the rise in crude oil prices, the hardening of commodity prices, the possible threat to and vulnerability of currency to interest rate changes in the US. There is also the possible effects of Trump’s triumph—from tax policies to the held-out threat to pharma and software majors.
Successive governments have been haunted by issues of data credibility—from the volatility of monthly indicators to the real level of poverty to the absence of explanation in the slide from 30 per cent to 23 per cent in the female workforce participation rate.
Then came the new GDP series raising the eyebrows of those in RBI and in IMF. Consequently, there is an embedded skepticism about the data used to derive GDP numbers. The puzzling questions—about the low offtake of credit and high rate of growth, about low capacity utilisation in core sectors, about the drag in demand and about the 6.9 per cent GDP growth in the final year of the UPA—have been in public domain for long. The dissonance between feel-good data and the not-so-good-feeling on the ground has been a constant buzz. Indeed, explanations on the many puzzles could be deployed as prescription material for insomniacs. The issue of quality of data is now accompanied by the issue of quantity of data available.
Issues relating to quality and availability of data could haunt the playbook of growth. The government has declared that a major focus area would be human development indicators—particularly with higher spending on education and health. Is there sufficient data to assess outcomes achieved by money already spent? Between the Centre and states, over `8 lakh crore is spent on the social sector. The fact is, this is the terminal year of the 12th five year plan—while the Planning Commission was disbanded plan allocations continued. The appraisal of the utilisation and outcomes of allocations during the plan period is pending at the Niti Aayog.
Similarly, direct transfer of a basic income in lieu of the many subsidies is a seductive idea that has caught the imagination of policy wonks and policy makers in the government. The idea requires an assessment of what the government is currently spending, who is getting it and who should be getting it. It also demands a recalibration of what the government should be engaged in and what it must fund and leave households to decide to choose and act upon.
For sure, the introduction of GST and the drive towards less-cash economy will enhance the quality and quantity of data that is available to design policy. That doesn’t take away from the diktat of the times. The question is whether the quality of data made available is adequate to make these calls? Can India afford to wait for 60 days after every quarter to know how the economy performed? Can a basic income scheme be designed amidst vague definitions of poverty and fuzzy data on the number of poor?
Meanwhile, the Niti Aayog has persuasively argued that India must shift from the April-March financial year to a January-December financial year. A committee appointed by the government has recommended that the government shift to a calendar-based financial year. This means that the budget will need to be presented in October. Will the system be ready with the requisite data to inform the government adequately?
In the era of knowledge, economy stumbling to success is not a sustainable approach. India needs to overhaul the methods of collection of data and its timely analysis.