The new series of national accounts was introduced in January 2015. The switch wasn’t overnight and impromptu, having been contemplated since 2008.
The new series of national accounts was introduced in January 2015. The switch wasn’t overnight and impromptu, having been contemplated since 2008. There were several sub-committees, chaired by people like K Sundaram, S Mahendra Dev, BN Goldar, AC Kulshreshtha and AK Adhikari. Until recently, the chairman of the National Statistical Commission was Pronab Sen.
In national income accounting, these gentlemen (there is no lady in the list) possess considerable expertise and are known and respected names. Subject to constraints on data availability, a problem incapable of instant coffee-like resolution, this switch was approved and recommended by them. But no matter. It is a sign of how important the economy has become that every person is obsessed with GDP numbers and has become an expert on national income accounting. This is no different from every person, even if he/she has never touched a bat or ball in his/her life, knowing better than MS Dhoni or Virat Kohli how to handle bowlers. Therefore, despite this being a newspaper, one is entitled to write GDP = GVA + taxes – subsidies. GDP means gross domestic product and GVA means gross value added. GVA is defined as value of output minus intermediate consumption (value of inputs). Note that national income accounting is done at current or nominal prices, then deflated to get constant or real numbers.
In those current prices, the Central Statistical Office (CSO) told us GDP increased by 10.8% in 2014-15 and 8.7% in 2015-16. Had there been a clamour for “reforms”, so that growth is higher, I would have understood. But no, there is clamour these numbers smell like fish sold by Unhygienix. The evidence given is of dipstick variety.
Over dinner, I spoke to 10 industrialists and none of them say their value of production has increased. First, even if value of production hasn’t increased, GDP can increase if taxes increase and/or if subsidies decline. Second, even if value of production hasn’t increased, GVA and GDP can increase if value of inputs declines. If one has imbibed that identity, and many critics evidently haven’t, this is simple logic. If one points a finger on the basis of value of production alone, one needs a crash course in national income accounting. Third, those 10 “industrialists” lead to a warped view. Simplifying a bit, under old series, production data was from ASI (Annual Survey of Industries). Simplifying a bit again, under new series, it comes from MCA (ministry of corporate affairs) database. The new database is broader, covers services better and includes smaller enterprises. Looking only towards large “industrialists” or “manufacturers” is a bit like wearing an eyepatch.
No one denies the expenditure approach is unsatisfactory, more so if one uses quarterly, rather than annual numbers. There too, there is an identity and there too, one needs to take off the eyepatch. Low growth in exports can be more than neutralised by low growth in imports. Low growth in government final consumption expenditure can be more than neutralised by high growth in private final consumption expenditure. There are several components in the identity and focusing on one, while forgetting the others, is what logic calls a fallacy of composition, applying the part to the whole.
Let’s now move to evidence of the slapstick variety. I spoke to 10 individuals and they don’t think their income grew by 8.7%. They don’t feel good. Other than limited nature of such sampling, this is subject to what economists call money illusion. Most individuals suffer from myopia of thinking in nominal rather than real terms. Though initially computed in current prices or nominal terms, GDP numbers are then reduced to constant prices or real terms. Thus, real growth was 7.2% in 2014-15 and 7.6% in 2015-16. In 2015-16, the differential between nominal and real was 1.1%, a measure of inflation. Do you feel better with 8.7% nominal growth and 1.1% inflation, or do you feel better with 12.6% nominal growth and 5% inflation? Most individuals opt for the latter and that’s the problem with feelers, because of money illusion. Low inflation is responsible.
Does this mean all is well? No, there are issues with GDP deflator, the inflation indicator, used to move from nominal to real. I don’t think we will solve this until we have a proper producer price index (PPI). A few critics have constructed their own GDP deflators (other combinations of WPI, CPI and other weights). But note, these aren’t superior to what the CSO does, not until we solve data constraints. Note also, the question mark is about real growth, not nominal. There have always been data issues. But since establishment in 1951, I don’t think the CSO has ever wilfully resorted to statistical legerdemain. Nor has it now.
To suggest otherwise, one needs to presume this grand design of jugglery started circa 2008. This entire episode reminds me of a debate between Bertrand Russell and one of the followers of Archbishop James Ussher, who computed that the world had been created in 4004 BC. When Russell mentioned fossils, the follower retorted these had been placed in the world to test our faith. There is no logical way to refute this argument. Similarly, one can respond to specific criticism and the only valid one is on the deflator, spliced with the argument about higher growth being desirable. However, if there are generalised assertions about CSO’s skullduggery, that’s the realm of faith by critics and there is no logical way to refute that.
The author is Member, NITI Aayog. Views are personal