Why questioning CSO on revised GDP estimates is to question too much of everything

Published: March 11, 2019 3:54:10 AM

To question the CSO on GDP revised estimates is to question too much of everything. Indian statistics have been a matter of national pride for decades, and remain one of India’s hallmarks. Let us question, but keep this curiosity rooted in fact-checking, balance and restraint.

Demonetisation led to higher formalisation of the economy. As formal economy share rises, the economic activity previously unaccounted for becomes part of formal numbers. (Illustration: Rohnit Phore)

By Devashish Dhar

The intention to question and make public institutions accountable is a noble and value virtue in democracies. However, the tendency to libel and undermine credibility of institutions is a downward spiral that stops at nothing. When the dust settles, it leaves behind damaging the legacy of decades-old pioneering work. Such misgivings and apprehensions develop an acute form of cynicism that would eventually damage how we function as a nation.

The Central Statistics Office (CSO) is facing a similar onslaught from various quarters for undue reasons. The recently-released quarterly GDP estimate has rekindled the debate around revised estimates for GDP growth for 2016-17 and 2017-18. According to the CSO, GDP at 2011-12 prices for 2016-17 and 2017-18 stands at Rs 122.98 lakh crore and Rs 131.8 lakh crore, respectively. This translates into GDP growth of 8.2% during 2016-17 and 7.2% during 2017-18. The din around these numbers is claiming that revised numbers are much higher than provisional estimates. In the May 2018 provisional estimates, the CSO pegged GDP growth of 7.1% and 6.7% for 2016-17 and 2017-18, respectively. The criticism is based on the belief that demonetisation damaged the growth pace and it is unlikely that we could have clocked 8%-plus growth in that year.

There are various reasons to refute the claims of critiques. For the purpose of this article, I will keep it limited to three.

First, as the name suggests, provisional estimates are subject to change and revised estimates (which also have multiple rounds) update the sector and GDP numbers as more data comes in. The time duration between first advance estimates and third revised estimates is 36 months. Revised estimates exceeded advance estimates earlier, too. A NIPFP paper details revisions in GDP growth estimates from 2004-05 to 2015-16. It compares advance estimates with all three rounds of revised estimates. Two times during the UPA, the third revised estimates exceeded advance estimates by 1.4 percentage points.

In 2013-14, revised estimates exceeded advance estimates by 1.3%. Barring 2008-09, when we were reeling under the Global Financial Crisis, almost in all years revised estimates were higher than advance GDP estimates during the UPA 1 and UPA 2. A separate RBI study notes that almost always earlier estimates underestimate the real GDP growth. It also points that major global economies regularly undertake these revisions, and in the US the mean absolute revisions on quarterly GDP are slightly more than 1.0 percentage points. The critiques are, therefore, kicking the dust for no good reason, especially when their own tenure witnessed such upward revision of GDP estimates.

Second, demonetisation in 2016-17 has been used as inscrutable excuse to almost demand for lower GDP growth numbers. GDP, after all, is a theoretical construct, which captures the economic activity within a geographical area. Increased formalisation in an economy is reflected in higher GDP numbers. Prior to demonetisation, certain economic activities may still be continuing, but the policy move nudged these activities to move under the formal net. Some indications of higher formalisation include increase in EPFO and ESIC subscribers. The number of employees registered under the ESIC took a jump of 55% in 2016-17 as compared to an average growth of 4.7% for the previous three years (2013-14 to 2015-16). Likewise, as per the draft report of the EPFO, the contributing members in 2016-17 grew by 9.6% as compared to an average growth of 6.8% over the previous three years. Clearly, there was a nudge towards increased formalisation due to demonetisation, which is subsequently recorded in official growth numbers. Anecdotal evidence points out that firms had an incentive to front-load wage payments, and to do it legally, they had to register their employees. While many rue the return of cash in the economy, such systemic changes are going to persist and even become the new normal for the coming years.

Third, a study done by the ministry of urban development highlighted that 47 municipalities received a windfall gain of 265.7% in November 2016 as compared to revenue in November 2015. These largely comprised of property tax and utility bill arrears payments. Of the 47 municipalities, Greater Hyderabad Municipal Corporation’s revenue increased by an astonishing 25 times, from Rs 8 crore in November 2015 to Rs 208 crore in November 2016. Likewise, Mumbai’s revenue for the month increased three times to reach Rs 11,913 crore. Not surprisingly, the gross value added (GVA) at constant prices for ‘electricity, gas and water supply’ grew by 10% in 2016-17 as compared to an average growth of 4.7% over the previous four years (2012-13 to 2015-16). Similarly, during demonetisation, there were reports that wages in many sectors were front-loaded. Agriculture and construction sectors are known for informal labour employment. For agriculture sector, GVA at constant prices increased by 6.3% in 2016-17 as against an average growth of 1.9% over the last four years. For construction, GVA at basic prices grew by 6.1% as against an average growth rate of 2.7% over the last four years.

Coupled with the implementation of the goods and services tax (GST), demonetisation created a ripple that positively impacted transactions and which had been a tough nut to crack previously. The Economic Survey 2017-18 points out to two such evidences. One, the number of new taxpayers increased substantially during the November 2016 to November 2017 period. During this period, the new taxpayers increased by 10.1 million as compared to an average of 6.2 million in the preceding six years. The Survey attributes addition of 1.8 million new taxpayers (by November 2017) due to demonetisation and GST reforms. Two, GST, even though implemented after 2016-17, added 3.4 million new indirect taxpayers. These are largely smaller enterprises that intend to claim input tax credits. Clearly, there has been a continuous trend of increasing formalisation. This translates into higher GDP growth numbers, as transactions that were out of the net were now being recorded.

The signals coming from different sectors fall in line with revised GDP estimates, particularly for 2016-17. Yes, to many, it may seem counter-intuitive. However, as new numbers come in, the CSO, as per standard practice, has revised the estimates. Revised estimates have exceeded provisional estimates in the past, too. In fact, the difference has been higher on more than one instance during the UPA years. Such revision also seems to be in line with the global GDP assessment exercises. Demonetisation during the year led to higher formalisation of the economy, as indicated in the EPFO and ESIC numbers. As the formal economy share rises, the economic activity previously unaccounted for becomes part of formal numbers. Also, demonetisation spurred considerable front-loading of expenses, such as wage payments in construction and agriculture sectors, both of which reflect in the higher GVA growth numbers for the sectors. The same could be said about the electricity, gas and water supply sector due to municipalities’ creative thinking of allowing people to clear arrears using demonetised currency notes. A win-win situation resulting in significant jump of revenue for at least 47 municipalities provided reasons to cheer.

To question the CSO on this issue is to question too much of everything. Indian statistics have been a matter of national pride for decades, and continue to remain one of the country’s hallmarks. Let us question, but keep this curiosity rooted in fact-checking, balance and restraint.

(The author is a public policy specialist, NITI Aayog. Views are personal Twitter: @dhardevashish)

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