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The larger picture on GDP numbers (Back series GDP numbers debate)
Read more on - Polity | Economy | Schemes | S&T | Environment
- Back series storm: The new data on GDP numbers became controversial upon release. The back series for GDP growth since 1993-94 was given.
- Why important? India adopted a new series in 2015, showing India’s GDP growing faster than what the earlier series showed. This helped the NDA II government, which said that the UPA II government had ruined the economy. But now, in the new series, the rate of growth during the last two years of UPA II was higher than what the old series showed!
- Handing the baton: NDA had inherited an economy with GDP growing at 8.4% in the second quarter of 2014. Macroeconomic variables had recovered from their lows in 2013.
- Things turned worse later: Data show that after the NDA took over, the rate of growth fell and then rose to a peak of 8.65% in 2015-16 Q4. After that it fell for five consecutive quarters — to 5.57% by 2017-18 Q1. The two shocks to the economy (demonetisation and then the GST) had a negative impact (series doesn't capture the shocks).
- Three aspects of debate:
- Why was the back series needed?,
- What do the data show?, and
- Why was the rate of growth during the UPA regimes higher?
- Representative set only: Any dynamic economy produces a large number of goods and services and new ones are added. The production of all these items has to be estimated in order to calculate the rate of growth of the economy. This requires lots of data, and instead of getting lost in that maze, a select set of items is taken to represent the entire economy. So, we can always question its accuracy.
- Earlier series becomes redundant: Obsolescence leads to earlier series of data not representing the true growth rate. So old series is replaced by a new one from time to time. The earlier series (from 2004-05) was replaced by a new series (from 2011-12).
- How do we compare? Analysts want a back series whenever a new series is prepared (otherwise how to compare). There were problems with the new series which is why the back series was not generated automatically. This is also why the new committee (which has presented its report) was set up.
- New items, broader base: The difficulty with the new series (2011-12) was
- it changed the bundle of items used to calculate growth, and
- it used a more extensive data base (of companies) called MCA21. This data base was available from 2006-07. It kept changing every year and did not stabilise till 2010-11 so was not comparable across years (could not be used to generate the back series).
- Committee made a new method: The committee used an assumption, which is debatable. A bias in the results seems to be that the growth rate in the new time series for the earlier part (the 1990s) is lower than in the old series whereas it is higher for the later part (the 2000s). It is also unable to take the black economy and the changes in the unorganised sectors into account.
- Fighting over the causes: The causes of the higher rate of growth under the UPA is being debated, and not the study methodology! The implicit admission is that the economy did grow faster under the UPA but due to wrong policies (allowing the fiscal deficit to rise, undue expansion of bank loans, etc). These led to non-performing assets (the twin balance sheet problem), higher inflation and current account deficit.
- Statistics: The higher growth was on the back of a 38% rate of investment and a 36% rate of savings achieved by 2007-08. These are now down to 32% and 30%, respectively. The 2007-08 crisis was a global one but the Indian economy managed to escape a catastrophe, and continued to grow due to increase in fiscal deficit from its record low in 2007.
- The crisis of 2012-13: It was due to the rise in petroleum prices and largely due to international factors.
- Today's slowdown: It is policy-induced and less due to international factors. The twin shocks (demonetisation and the GST) played havoc with the unorganised sector (not yet captured in data). Household savings have declined sharply and the investment climate remains poor.
- Summary : The government should leave back series analysis to experts, and not read political lessons into it, as complex factors exist on both sides of 2014.
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