Ever wondered about the persistence of myths i.e. falsehoods masquerading as reality? I look at two myths that have gone beyond their sell by date. Myth number one is that the Congress is on an upswing as revealed by the recent assembly election data. The argument in support of this hypothesis (myth) is that the Congress got a larger fraction of the votes post May 2014 than they did in the 2014 general election. Myth number two is that the new methodology, and new results, on GDP are deeply flawed, and erroneous, and especially so when compared to the old GDP data. No myth maker is contending that the old GDP data was perfect; just that it was much closer to the “true” reality.
There is a reason why some myths never die—they are not allowed to. But who would want to do that—obviously, someone with deep interest in the falsehood.
Myth # 1: Congress less weak than conjectured
Election results are determined by many factors—leadership, alliances, and some even contend that caste is a factor. The 2014 election result (simple majority for the Modi-led BJP) can be considered a one-off event; hence, state elections held after May 2014 may yield a more accurate picture about the underlying electoral reality—i.e. Congress better than it looks; BJP worse than it appears. At least that is the hypothesis.
The table shows the seat performance in the 10 major states that have had an assembly election since the May 2014 general election. In the table, we are ignoring the results of the Lok Sabha elections for the Congress (or BJP). We are concerned with the simple proposition—is Congress in recovery mode, or is it still proceeding downhill. General elections are held only once every five years—assembly elections can indicate the “pulse of the nation” at sequential points in time. Also, it is often alleged that voters vote differently in the state elections than in general elections (another myth). The analysis of state elections can provide meaningful answers.
Both the major parties fight elections with allies. The table shows only the seats won by the two major parties on their own. Two striking results emerge—first, that regional parties across the ten states have held their dominance. Second, that the voter has comprehensively switched from the Congress (INC) to the BJP. Note the near identity of INC seats pre 2014 with BJP seats post 2014—from 328 INC seats to 351 BJP seats. Also note the near identity of INC seats post 2014, 202 seats, with BJP seats pre 2014, 206!
All that has happened is that the voter made a complete switch (and a little bit more) from the Congress to the BJP. The center of gravity has shifted from the INC to the BJP—this was obviously indicated by Modi’s victory in 2014; the assembly results confirm that 2014 was not an exception, but rather signified the emergence of a new rule.
Myth # 2: GDP growth much less than indicated by new method
The second persistent myth pertains to the presumed inaccuracy of Indian GDP data. This myth, with considerable support from market economists (as opposed to economists qua economists—less support here), states that Indian GDP data are overstated by a reasonable magnitude. The benchmark for these mythmakers is the old GDP data, and their flagship is the following observation – in 2012/13, the old GDP growth rate of 4.7 % was revised upwards to 6.7%. So what is the problem? GDP data are periodically revised, and the 2011/12 revision is the fifth revision since the mid-seventies.
Did you ever hear any problem with the previous four revisions—you did not, because there wasn’t even a murmur of protest, there was only broad based and unanimous acceptance. But “obviously” the new revised GDP method is wrong because as we all know—so say the myth makers—the economy did not feel like it was growing at a 6.7 % rate in 2012/13. As evidence the tepid nominal 10 % growth in bank credit (and other questionable inferences) is offered. Low growth in bank credit implies low growth in GDP. Right? Wrong.
And here is why. If the old GDP series is the preferred feel indicator, let us test how the felt reality worked when we did not have the new series. Using the WPI as the index to convert to a real credit growth series (acceptable conceptually and used by the mythmakers), it turns out that in the four fiscal years 2000-2003, nominal bank credit growth was 17.3 % and WPI inflation 4.8 %—i.e. an average real credit growth of 12.5% per year. This strong credit growth should have resulted in booming GDP growth. Right? Wrong.
GDP growth (old series) during these booming credit years was a paltry 5 % per annum. The simple point is that no feel indicator works well individually and cannot be expected to do so—the sum of all the feel growth indicators is the GDP series itself. That is why analysts, economists, and policy makers look at the GDP. In other words, a portfolio behaves in a less volatile fashion than an individual item (or indicator).
Going Behind the Myths
The fact still remains as to why, despite considerable evidence to the contrary, both myths continue to exist. (Incidentally, the definition of myth is a widely held false belief or idea.) Could there be a common explanation for this stubborn persistence? The Congress went down to a hugely unexpected, and huge defeat, in 2014. Not surprisingly, the Congress party itself (and their apologists) are in deep denial. If anybody wants to understand the psychology behind this denial, look no further than the Monty Python and the Holy Grail Black Knight clip. As King Arthur methodically dismembers Black Knight John Cleese, the denial Knight keeps asking for more fights—and when Arthur shrugs his head at the stupidity, Cleese hollers some epithets—“you are running away, you yellow bastard”. Congress’s inaction and obduracy (and sheer stupidity) in delaying the introduction and passage of the GST bill reminds one of the Black Knight.
One reason for the myths lasting beyond their sell date is because the Congress wants this to happen. Some experts will follow the Pied Piper. (At the same time, let me emphasise that a few of the experts are genuinely misguided and are definitely not part of my conspiracy theory). And why would this happen? Because in order to make even a modicum of a comeback, the Congress has to show that the BJP is not performing in the delivery of one of its key promises—higher growth. If the BJP delivers higher growth, and keeps winning elections, then what is the Congress going to do—find myths. The author is contributing editor, The Financial Express, and senior India analyst, The Observatory Group, a New York based macro policy advisory group. Twitter: @surjitbhalla