Rejigging statistics
The comprehensive overhaul of India’s national income statistics,
which places India among the fastest growing economies in the world, confounds economists, policymakers and the government. By V.
SRIDHAR
GOOD tidings, even if only of the
statistical kind, can be bewildering. Just as Union Finance Minister Arun
Jaitley started preparing for his first full-fledged Budget, news came that the
Indian economy was chugging along merrily at a world-beating rate of 7.4 per
cent in the current year. But the problem for the Finance Minister is in
reconciling this apparent acceleration in the pace of growth with other
evidence on the ground.
For instance, how can an economy that is
growing at its fastest in recent years also experience its lowest levels of
inflation in about a decade? Or, how come the booming economy is not
experiencing a growing demand for credit from the banking sector? These ought
to perplex a Finance Minister in normal times, but for now the political
captains of the Indian economy seem to be savouring the glad tidings ushered in
by a statistical adjustment, instead of worrying about how they square with reality.
The latest revision to the national accounts, including fundamental
changes in the methodology of calculating national income, has confounded not
only economists and policymakers but also the government. While the changes in
the methodology have been justified because they now adhere to international
best practices as defined by the United Nations’ System of National Accounts,
the problem for practitioners is their backward compatibility.
This is not a trivial issue. Any statistical set that is incompatible
with past estimates makes it difficult to compare magnitudes of the past, which
is the analytical basis for statisticians, policymakers, the government and
citizens at large. This is precisely the problem posed by the revised numbers,
especially of the gross domestic product (GDP). When the revised GDP numbers (with
the new base set at 2011-12) were released in January, they caused a stir
because they conflicted with the perception that the Indian economy had slowed
down significantly in the past few years. But more consternation was in store
when, on February 9, the Central Statistical Office (CSO) released advance
estimates of the GDP, which indicated that the Indian economy would grow by 7.4
per cent in the current year (2014-15).
Soon after the release of the first set
of new numbers in January, Reserve Bank of India Governor Raghuram Rajan, in a
thinly veiled expression of surprise at the numbers, said: “We need to spend
more time understanding the GDP numbers.” He added: “It is premature to take a
strong view based on [the new] GDP numbers.” In particular, Rajan expressed
surprise over the revised growth numbers for 2013-14, which was by common
concurrence a bad year for the Indian economy. “Most of the data we have seen
in 2013-2014, except inflation which was very strong, give us a sense that
there was a slack in the economy,” he observed. The quizzical
reaction of the Governor of the central bank warranted a briefing by the CSO
Director General, Ashish Kumar. “Now they [RBI] have no doubts about it,” Kumar
said after the meeting with the RBI Governor on February 18.
The new data, using a brand new methodology, showed that the Indian
economy grew at 6.9 per cent in 2013-14, not at 4.7 per cent as estimated
earlier using the old series (2004-05 base year). The growth rate for 2012-13 was
also revised upwards to 5.1 per cent, instead of the 4.5 per cent estimated
earlier. However, within the same data set there
lurked several other surprises, notable among them being the rate of capital formation.
One would normally expect asset formation to gather pace during an economic
upswing; however, the new data show that capital formation declined from 37 per
cent to 33 per cent between 2012-13 and 2013-14. How could a smartly growing
economy simultaneously experience a deceleration in asset formation? This was
the obvious question raised by sceptics.
New method
The CSO, in its note to the new
statistical series, has identified three major changes in the way it computes
national income and output. The first relates to how national GDP as a measure
of what in economic parlance is referred to as incomes accruing to various
“factors” of production—land, labour and capital and rewards to entrepreneurs
—is calculated. The second pertains to the usage of market prices to compute
GDP; the justification for this emanates from the logic that these are the
prices at which economic agents actually transact in. The third major change
has been the introduction of a new concept of “basic prices” in order to
compute the extent of gross value added (GVA) in the new methodology. The
concept of basic prices involves the netting out of taxes and subsidies in
order to arrive at the level of GVA in the economy. Analysts have pointed out
that the singling out of the government as a separate entity (and an economic
agent) in order to compute GVA is not justified by any system of national
accounts. Their logic stems from their understanding in economic theory that
the government cannot be counted as a factor of production in its own right.
But
by far the most significant change—which appears to have contributed
significantly to the apparent inflation in levels of national income —has been
the inclusion of new data sources. Foremost among them is the usage of data
filed by companies to the Ministry of Company Affairs, instead of relying on
the sample surveys conducted by the RBI and the Annual Survey of Industries,
which is released by the Union Ministry of Statistics and Programme Implementation.
The reliance on the new data source, which gathers data from over five lakh
companies, has been justified as being more comprehensive and superior in sweep
when compared with both the RBI’s sample and the relatively small coverage
(about 2,500 companies) of the Annual Survey of Industries.
The usage of the new method and data source has resulted in dramatic
changes in the rate of both savings and investment by Indian companies.
Savings, as computed by the new method, were 30 per cent higher than those
computed by the old method (2004-05 base) in 2011-12; for 2012-13 the new
method yielded a savings rate that was 40 per cent higher! In effect, if one is
to rest sound economic advice on the new data, the share of the private
corporate sector in national savings has increased from about 29 per cent
(according to the old series) to 40 per cent (as per the new data set).
Significantly, while the portion of GDP
emanating from the manufacturing activity is set to increase by 6.7 per cent
during the current year, growth estimated by another data source, the Index of
Industrial Production (IIP), grew by only a little over 2 per cent in the nine
months ending December 2014. Even the earnings and profits of corporates during
the year have been pretty disappointing, as is evident in the response of the
share markets to their announcements.
Problematic source
One possible explanation for the
inflation in national income could perhaps lie in the very choice of data source,
especially those emanating from the Ministry of Corporate Affairs. The data
are, after all, an aggregation of data (primarily of a financial nature) that
are furnished by corporate entities. This could result in the possible
inflation of the data on two counts.
First, there are questions about the
sanctity of the data submitted by corporates for purposes that are primarily of
an accounting nature. The verification of such data could be problematic for
several reasons, one among them being the competence and ability of the
Ministry of Corporate Affairs to sift through this data for a purpose that it
is not designed to perform. Second, there is a possibility that the data,
because they are meant primarily to be for an accounting purpose, have been
“financialised”, which could explain the inflation in the numbers on the level
of national income.
Even if the new data set has resulted in
better coverage—and, conversely, less “leakage” of statistics pertaining to
economic agents—it still poses serious challenges.
It is easy to understand the
argument that the new method captures a wider picture of the economy, which
explains the inflated numbers pertaining to the national income. But this is
about the level of national income generated during a year. How does one
explain the relative performance of the economy over time, as measured by the
growth rate of the economy over time, especially when they are irreconcilable
with other numbers pouring in from other sources of data? In many ways, it is difficult to escape
the conundrums that the new data pose. While industry has welcomed the pace of growth,
its complaints of the government not doing enough to “ease” the process of
doing business would ring hollow. For the monetary authority (the RBI), a cut
in interest rates (a continuing clamour from industry) would be incompatible
with the new numbers on growth. As for Arun Jaitley, reconciling the
substantial slack in economic capacity (of men as well as material) with the
rosy numbers will be a tough task indeed.
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