The writer is an economics and business commentator based in New Delhi. He is an economist by training and has worked in most of the leading newspapers of the country for the last 34 years. He also teaches economics and international business in MBA programmes for the last seven years and has been involved with various think-tanks in the capital
Ahead of the national elections this year, India’s ruling BJP-led NDA regime will, no doubt, bask in the glow of regaining the ‘fastest among major economies in the world’ position according to the International Monetary Fund. This can be the crucial evidence that it has honoured its promise to bring the good days back again.
To bolster its electoral prospects, the incumbent government would surely ram home another statistic, notably, that growth during its term was much faster than during the UPA regime. How credible are such claims? Will the India growth story make a difference at the hustings?
India’s growth is projected at 7.4 per cent in 2018-19 up from 6.7 per cent in 2017-18. These numbers refer to the annual increase in gross domestic product or GDP after taking into account inflation. The latter is a measure of how much more one has to pay than one did last year and is measured in reference to a base year. For GDP calculations by India’s Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation, the new base year is 2011-12 and the previous one was 2004-05. This has been done to take into account changes in the structure of production and better methodologies.
GDP estimates the world over are frequently re-based and even sharply revised with more up-to-date databases. In 2014, for instance, Nigeria’s GDP was jacked up by 89 per cent after revision in methods and re-basing. On a lighter note, following an EU agreement on GDP standards to include income from selling recreational drugs and paid sex, these changes added as much as 0.7 per cent to Britain’s GDP. Such changes enlarge the absolute size of GDP but the annual growth rates usually do not change that much. As we shall see later, this problem, unfortunately, bedevils the NDA vs UPA growth claims.
Reclaiming the world’s fastest-growing economy tag with the projected 7.4 per cent growth is one thing, achieving this number is another matter. The prospects in fact are somewhat daunting in this regard, as the Indian economy has not fully recovered as expected from severe disruption due to the twin shocks of demonetisation – when 86 per cent of currency was taken out from circulation to check unaccounted wealth in November 2016 -- and the introduction of a nationwide goods and services tax that scrapped state levies to turn the nation into a single market on July 1, 2017.
India’s GDP growth during the July-September quarter of 2018-19 fell to 7.1 per cent from 8.2 per cent in the April-June quarter. This ended four successive quarters of acceleration from the July-September quarter of 2017-18.
During the remaining half of this year, further deceleration is likely. Rural demand will be subdued as sowing operations were lower during the winter or rabi season. The stock markets have been volatile with foreign investors pulling out their money. The downside risks include prospects of a global trade war, worsening geopolitical tensions, weaker global growth.
If growth falls to 7 per cent in October-December and 6.7 per cent in January-March, according to SBI group chief economist Soumya Kanti Ghosh, the result is 7.2 per cent for 2018-19. However, even at these levels, there are hardly any other large economies with a comparable pace of expansion in the global economy. But this growth could unravel more dramatically if downside risks take a turn for the worse.
Instead of being buffeted by strong global headwinds, the Indian economy needs favourable tailwinds and a strong domestic-led pace of economic expansion to sustain even a 7 per cent trajectory.
If the current year’s performance is blowing in the wind, what is the track-record of four years of the NDA regime? The average is 7.4 per cent: Rising from 7.4 per cent in 2014-15 to 8.2 per cent in 2015-16 followed by a sharp downswing to 7.1 per cent in 2016-17 and 6.7 per cent in 2017-18. Last year’s low clearly reflected the adverse and still persisting impact of demonetisation and GST. The severe knock to India’s growth and decoupling of its performance occurred when the world economy was experiencing a broad-based synchronous recovery according to the Economic Survey for 2017-18.
Under these circumstances, the only way the NDA can secure a potential electoral dividend of sorts from its four-year performance is to show that it is still better than the previous UPA regime’s. As if on cue, the CSO under the aegis of the Niti Aayog released a back series from 2004-05 of GDP estimates with 2011-12 as the base on November 28.
During these seven years, 2004-05 to 2011-12, when the UPA was in power, the earlier series with 2004-05 as base showed an average GDP growth of 8.2 per cent. The new back series substantially downgraded this performance to 6.9 per cent.
NDA’s growth thus appears better than the UPA’s. But is the latest back series credible? No. For starters, what detracts from the credibility of these numbers is the association of Niti Aayog.
“Niti Aayog’s like the old Planning Commission, a political one. It is supposed to be an extension of the Prime Minister’s Office and the moment the Niti Aayog comes into the picture, it tends to give a political colour. This may not actually be true but that is the impression that comes out. Otherwise, they have absolutely no business in convening the data release,” stated former chief statistician, Pronab Sen.
Three years ago, the CSO had calculated a back series with 2011-12 as the base that showed an upward revision to growth in the UPA era. The then vice-chairman of the Niti Aayog took one look at it and said: “We cannot allow it,” according to Sen, who was present at that meeting as chairman of the National Statistical Commission.
Niti Aayog had issues with a proxy for growth estimates of the corporate sector. In July 2018, the Committee on Real Sector Statistics headed by Dr Sudipto Mundle put out another back series that also showed higher growth during UPA, but that effort was termed “not official”.
The CSO’s defence is that the methodology for preparing the back series from 2011-12 to 2004-05 is “largely” the same as the one followed in the new GDP series with 2011-12 as the base. The data used is also in sync with the recommendations of the UN System of National Accounts, which included the estimation of gross value added or GVA at basic prices, among other things.
This is arrived at by adding up the value of goods and services produced in the country minus the inputs. Accordingly, GDP is the sum of GVA plus product taxes minus product subsidies.
On the methodological front, “largely” is the operative word as far as the corporate sector, in particular, is concerned. The 2011-12 series incorporated a more up-to-date base of the Ministry of Corporate Affairs that had the annual financial accounts of nearly 500,000 companies, compared to the data of a few thousand companies that was previously accessed from the date base of the Reserve Bank of India. While this MCA-21 database is a treasure trove of latest balance sheet information, it is unfortunately not available for earlier years. In other words, this source cannot be used backwards from 2011-12.
The CSO thus had no alternative but to use the more limited database of the Centre for Monitoring the Indian Economy for some of the earlier years as also the non-corporate or quasi-corporate data of the more robust volume-based estimates of the Annual Survey of Industry, which was the mainstay of the earlier GDP series to estimate organised manufacturing’s contribution.
The limitations of data unavailability have no doubt forced the hand of the CSO to work out the back series with a hybrid methodology. How comparable then is all of this to the exclusively MCA-21 data from 2011-12 onwards?
Beyond the Niti Aayog factor, the back series lacks credibility as it also fails the smell test. As we noted earlier, re-basing GDP estimates with different methodologies and up-to-date databases typically enlarge the absolute size of GDP, but the annual growth rates should not change that much.
Interestingly, the absolute size of GDP in 2011-12 – the very first year of the new series – is lower when compared to the earlier 2004-05 series: the nominal size of GDP is significantly lower by as much as Rs 2.7 trillion at Rs 87.4 trillion when compared to the GDP estimate of Rs 90.1 trillion of the earlier series. Moreover, how can the GDP growth from 2004-05 to 2011-12 be downgraded, when this was a period when India’s exports boomed, credit growth, corporate sales and profits were in double digits and investments took off? Although the share of manufacturing, electricity and construction or the secondary sector is higher, the back series shows slower growth of 8.8 per cent compared to 9.1 per cent of the 2004-05 series. In sharp contrast, during the NDA years, exports were down, credit languished, corporate sales and investments were low, yet GDP growth was much higher.
For such reasons, the NDA is unlikely to secure electoral gains from claiming that under its regime growth was much faster than the UPA. To make a difference at the hustings, it must show that the India growth story under its watch has been more inclusive. That the rising tide of 7.4 per cent growth has lifted all boats, as it were.
GDP growth, unfortunately, is only a summary statistic. Although the average levels of prosperity have gone up, the big question is whether the gains have largely gone to the affluent sections of society while living standards of the vast majority have fallen behind?
Farmers and agricultural labourers, who account for roughly one of two working Indians, have lagged behind in a big way. The latest Economic Survey indicated that their incomes have been stagnant over the last four years.
There is also a likelihood of further declines in the future, thanks to climate change or global warming. To contain the widespread agrarian distress, the NDA government appears committed to doubling farmer incomes by 2022. The narrative of nationwide farmer discontent weighs heavily over the forthcoming national elections.
Has India’s rapid economic growth resulted in employment? The NDA regime came to power in 2014 by promising development and jobs for the youth. On the face of it, growth hardly matters to the electorate if it has not generated an adequate number of jobs to absorb the 12 million job seekers who enter the labour market every year. The dismal reality instead is that there are as many as 25 million highly educated job applicants for 90,000 low-level railway jobs. The electoral preferences of the youth – who constitute a substantial segment of the voting population – may well decide the 2019 election.
If the NDA regime does return to power, the challenge ahead is to sustain the current growth trajectory over a period of time. That is not easy: it depends not just on structural reforms but also a stable social and political environment. Structural reform includes those of factor markets: labour, land and capital. Land acquisition laws are in a limbo. The clean-up of the bank and corporate balance sheets must accelerate so that bank credit revives to stimulate growth. Reforms to free up agricultural product markets to make cultivation more viable also must be on the table.
Labour laws also deserve priority attention. Greater labour market flexibility will encourage job creation and enable India to reap the demographic dividend of a young workforce. If not there will be considerable social and political unrest that can eventually derail the growth narrative.
As if all of this weren’t bad enough, inter-state disparities in growth have also widened as faster-growing, richer states have steadily pulled apart from the slower-growing, poorer states in the country. The regime in power must, therefore, realise that to sustain rapid growth it must be more inclusive.