It says something about how far above the Hindu rate of growth (1950-1990) we have come when you see that growth rate of GDP, at 5.8%, is described as a tottering economy. It is not only the second-highest in the world but also not to be sniffed at, whatever rank it may have.
There are two issues here. One, the chattering classes did not predict Modi’s strong result as they had explained to themselves that, with the jobs famine and farmers’ distress, demonetisation and GST, the BJP will get below 200 Lok Sabha seats and the Congress above 100. Having recovered from that shock, they are keen to find something-anything-to downplay Modi’s success.
The other issue is that economic experts find numbers exciting, especially those which can be called the highest or lowest, be it the growth rate, the unemployment rate, or whatever. These are preliminary estimates subject to revision. No number in economics is entirely accurate. You have to say 5.8% +/- 1%. Then, this is a quarterly growth rate annualised, i.e., it is the growth rate between the last quarter of 2017 fiscal and that of the 2018 fiscal. The annual growth 2018 fiscal year will be the average of the growth rates of its four quarters. Even if the quarterly growth rate is 2% lower, as was the case during demonetisation in the third quarter of fiscal 2016, it will reduce the annual growth rate for 2016 only by 0.5%, i.e., one quarter of 2%.
When some people (Dr Manmohan Singh, for example) claimed that demonetisation had reduced the growth rate by 2%, they did not add that the overall annual growth rate would be down by 0.5%. This is why the annual growth rate for 2016 does not look bad.
Yet, the more serious issue is not statistical but causal. In Indian debates on the economy, the idea prevails that the government is the major, if not the only, cause of increases or declines in the growth rate. The idea that what happens in the economy is largely the sum total of the economic choices made by millions of consumers and firms, with government playing only a marginal role, is thought to be bizarre. This is a belief among all political parties. The notion that there are matters where the government is not the most powerful actor cannot be faced by the Indian political system. The government can sometimes make matters worse by precipitate action or an overdose of stimulus when a mild dose would be preferable. The science of optimal control in economic policy is a complex one. No government in the world has ever got everything right or disastrously wrong, for which we can all be only grateful.
The appointment of two ministerial groups shows this attitude. I would have waited to see whether the drop in the growth rate from the third quarter of fiscal 2018 to the fourth quarter of fiscal 2018 needs drastic action. I would have explained the drop between the two successive quarters as partly caused by uncertainty in the quarter before election, as well as the reluctance of RBI to be seen as helping the government win the election by cutting interest rates before voting started. If the decline continues, then there may be need for some policy move.
Finance minister Nirmala Sitharaman is a level-headed person and a trained economist. In her first Budget, I expect her not to throw caution to the winds and opt for large spending injections. I would use the four quarter moving average to gauge if there is a trend before doing anything. The World Bank thinks the growth rate would be at 7.5%, so we should be somewhere between 6% and 8%.
My major concern is over the quality of the labour market data. The NSSO figure, leaked before the election, claiming that the unemployment rate was the highest in 45 years was just bizarre. Forty-five years ago, i.e., in 1974, the Indira Gandhi government was facing cross-country protests against inflation: Jayprakash Narayan had come out of retirement to lead student-demonstrations in Gujarat and Bihar, and George Fernandes had led a massive rail strike across the country. It was these troubles which drove Indira Gandhi to impose the Emergency. Does 2019 look like 1974? When an economy has grown at around 7% for five years, how can unemployment be the highest in 45 years?
The government needs to get a grip on the issue of data quality. We have had wide variations across government surveys as well as among private experts about the number of jobs created, the number of jobless, labour force participation rates, etc. India used to enjoy a good reputation with regard to the quality of its statistical services. The definition of jobs-full-time, formal sector jobs or livelihoods (remember the pakodawala?)-needs to be delved into. It may need anthropologists as well as statisticians to understand what has been happening in the economy. Now, there is time to face up to these issues and fix the system. That would solve a long-term problem.
The author is a prominent economist and labour peer. Views are personal