GDP figures: Statistical illusion
Our government has reported that India’s economy grew at a healthy 7 per cent in the fiscal third quarter. For the past four months, the whole world has been keeping an eye on the adverse impact of demonetisation. Who are we fooling by denying the fact that India has suffered a sizable loss in jobs and production after the ill-conceived currency exchange measure? The figures released by Central Statistics Office (CSO) have been received with a sense of disbelief. Most global economists have found the CSO’s claim questionable and viewed the data with suspicion. It has undermined the credibility of our results.
In his most recent election speeches, Prime Minister Narendra Modi celebrated this claim of steady GDP growth, albeit prematurely, just to generate a misplaced sense of euphoria. The Prime Minister should not indulge in such acts. A country’s economic health indicators should not be manipulated to further narrow political agendas. The most amusing part is that CSO has stated that it has not been able to collate the data of impact of demonetisation including the losses in jobs and production especially in the Micro, Small and Medium Enterprises (MSME) sector. Nonetheless, we are being told by no less than the Prime Minister himself that he has defeated Harvard with his “hard work”.
Speaking to the press, Congress spokesperson, Anand Sharma said: “The government, the Prime Minister, and the Finance Minister are guilty of misleading the people by ignoring the sufferings inflicted on the poor, especially the farm labour, the factory workers and the daily wage earners due to their ‘reckless’ decision.” As per its own admission, the CSO has stated that it has not been able to collate the data of impact of demonetisation, including the losses in jobs and production especially in the Micro, Small and Medium Enterprises sector. “Therefore, the GDP numbers, ignoring the harsh ground realities and based on an increase in revenue from indirect taxes, are artificial and highly misleading,” he said. Renowned Indian economists have calculated the loss of not less than Rs 2.5 lakh crore to the country’s economy after demonetisation.
International analysts have also confirmed a huge loss to Indian economy and still predict a two per cent slip in GDP growth. Prime Minister Modi must have refrained himself from ignoring the grim reality. He is well aware that the real picture will emerge when the data of unorganised sector and the incumbent job losses is compiled in the middle of 2017.
Global economists had forecasted in a poll held by Reuters that India’s third quarter GDP growth will go down to 6.4 per cent because of Modi’s crackdown on cash. The Prime Minister has given these economists a reason to scratch their heads by announcing that India’s economy remains untouched by demonetisation. The masses with little knowledge of economic nitty-gritty can perhaps buy whatever Modi tells them. However, if we think that our theory of the faster-than-expected economic growth in December quarter will go down well with global experts, despite a move that drained cash from consumers, we are living in a fool’s paradise.
There are limitations to the way that GDP statistics are collected. Every transaction in the economy is not added up. There is a sampling instead. It is as accurate as it can be made. This sampling takes place only in the registered and tax paying economy. The government has no official information about the other part that is unregistered and untaxed. Anyone can guess that how much effect the cash ban would have had upon the unorganised sector. Our GDP statistics of the cash-using economy are based on predicted correlation between those who use bank accounts and who transact in cash. It is hard to believe that Modi’s war against cash has left the economy untouched as far as GDP growth is concerned.
The Modi government’s inclination towards fudging GDP data is nothing new. It had introduced a new method of GDP computing in 2015 which created a serious controversy. Economists had called it a “statistical illusion”. There was no dearth of experts of economic science who labelled the new approach as “crazy fudge, a delight for emperors in need of clothes”. There was a huge hue and cry about “discrepancies” in GDP estimates for the fourth quarter in 2015-16 too. If those discrepancies hadn’t been there, real growth would have been 3.9 per cent and not 7.9 per cent. But Modi did not pay any heed to this then also.
After CSO unveiled the new way of calculating the GDP, India’s growth numbers suddenly started to look better. The GDP growth as per the old method had stood at around 5 per cent. With the new method, the GDP growth suddenly crossed 7 per cent despite the fact that exports were down, two-wheeler sales growth has been relatively insipid, and railway freight growth has been very slow, bad loans of banks were rising at a fairly rapid rate, their lending growth has been very slow and corporate earnings growth has also been terrible.
India’s GDP became a subject of political debate in the last week of September 2015 also following Modi’s remarks in the United States that India’s GDP is $8 trillion. It was a complete fabrication. When the UPA government had left office, India’s GDP was $2.27 trillion, and when Modi was in the US, it was close to $2.50 trillion.
Economists feel that the CSO seems to be using a lower GDP deflator to arrive at the real GDP growth number. This has led to a higher real GDP growth number, which seems unreal. The real GDP growth number is essentially the nominal GDP growth number minus the GDP deflator.
The real numbers are derived by taking nominal data of the economy and deflating them by price indices. So, if inflation is understated, then real growth is going to be overstated. And this is what has been happening in Modi-era. His government must realise that governance is not just a series of calculations. It is about leading the people in the right direction and not misleading them.
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