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Issue No.: 573 | March 2015

Distortion, Damned Distortion and National Accounts Statistics

Sunil S. Bhandare
How does such statistically driven enhancement of growth rates help policy makers and various stakeholders of the economy?

What a pleasant surprise it turnes out to be just on the eve of the forthcoming budget – a sudden disclosure of impressive growth numbers emanating from the revised national accounts data series! We are now being told that the economy has been cruising at the impressive rate of 6.9% in 2013-14 and 7.4% in 2014-15 – and not at the stunted rate of 5% and 5.5%, respectively, as was widely proclaimed practically in all the official sources, including of the Reserve Bank. How has this wonder been made possible? And there runs a story of a revised data series compiled by the Central Statistical Organisation and released by the MOSPI recently. 

What does it seek to convey? Some technical explanation becomes imperative. In effect, the new series provides for three crucial features: first, the revision of base year from earlier 2004-05 to 2011-12; second, the inclusion of international guidelines involving conceptual changes – for example, the earlier practice was of calculating gross domestic product [GDP] at factor cost. This will no longer be operational. Henceforth, GDP at market prices will be referred to GDP and this will comprise Gross Value Added [GVA] at factor cost [or at basic prices] + production taxes – subsidies; and third, incorporation of revised methodology of compilation, latest classification systems and new and recent data sources. 

Consequent upon such changes, there is a substantial revision in both absolute figures and relative growth rates of GDP data measured under old series [2004-05 base year] and new series [2011-12 base year]. Not to confuse readers with a huge data muddle, only growth rates are shown in the following table:

GDP at Market Prices
[Constant Prices]*
         Old                    New           
GDP at Market Prices
[Current Prices]
         Old               New      
2012 - 13 4.7 5.1 2012 - 13 12.2 13.1
2013 - 14  5.0  6.9 2013 - 14 12.3 13.6
     2014 - 15 **   5.5# 7.4      2014 - 15 ** N. A. 11.5

* Real GDP 
** Advance Estimate available only for the new series. 
# According to Govt of India’s Mid-Year Review released around Mid-Dec 2014. 

So far so good! But how does such statistically driven enhancement of growth rates help policy makers and various stakeholders of the economy? And here we run into major confusion and cobwebs. Listen to the words of caution coming from no less a person than the Chief Statistician of India, Dr. T. C. A. Anant [excerpted from Mint of February 12, 2015]. He points out that 

[a] a growth rate on par with China doesn’t mean that India’s economy is booming;
[b] despite what the numbers say, the economy is still recovering and the central bank shouldn’t use
       the upward revision in growth alone to decide on interests rates; and 
[c] RBI shouldn’t use these numbers mechanically. … If you use old models for new data, your                 judgement won’t be accurate.  

Almost in the same vein, the Chief Economic Adviser, Ministry of Finance, Dr. Arvind Subramanian has called the data mystifying and puzzling. How has the Reserve Bank reflected on this new phenomenon? In the latest monetary policy statement, it is evident that the Reserve Bank is using the old GDP base figures and retains growth rate at 5.5% for 2014-15. Further, it observes that "for 2015-16, projections are inherently contingent upon the outlook for the south-west monsoon and the balance of risk around the global outlook. Domestically, conditions for growth are slowly improving with easing input cost pressures, supporting monetary conditions and recent measures relating to project approvals, land acquisitions, mining and infrastructure. Accordingly, the central estimate for real GDP growth in 2015-16 is expected to rise to 6.5 percent with risk broadly balanced at this point”. More importantly, it points out that the revised series of GDP statistics will need to be carefully analysed and could result in revision in its growth projections for 2015-16. 

Does it help the Finance Minister in his fiscal management? The sharp upward revision in estimated real GDP growth in 2014-15 may help the NDA government to be pretentious about its so-called performance in the very first year of its tenure. But it is unlikely to improve the crucial parameter of fiscal management – the fiscal deficit to GDP ratio. To keep this ratio within the budgetary target of 4.1%, the absolute amount of fiscal deficit in 2014-15 will have to be cutback from Rs.531,177 crore to Rs.518,806 crore – that is by over Rs.12,000 crore. However, the official data shows that the deficit has already reached Rs.532,000 crore during April-December 2014-15. Thus, a major cutback in Plan Expenditure is inevitable with its adverse implications on capital formation and future growth.   

Further, with 7.4% real GDP growth rate in 2014-15, the FM in his Budget will have to pitch for a higher growth target, say, of 7.5 to 8% for the next fiscal year [2015-16]. Will this carry any conviction with business and industry or investors, either domestic or foreign? How about the ground reality? Come and behold the lacklustre industrial growth numbers, moderate top-line [sales and other income] increases of corporates, setback to agricultural economy, moderate bank credit growth and lack of buoyancy in government’s tax revenues. In substance, what transpires is that the issue of trustworthiness and related measures of economic analysis would continue to harass policy makers and all other stakeholders of the economy.  

Not surprisingly, many keen observers have already expressed their scepticism about revisions in GDP growth numbers. Perhaps, never before the revision in the base year or improvisation of data system have created such distortions in levels of growth rates and in interpretation of other key macro-economic parameters. Illustratively, the interesting fall-out from this data is the derived estimation of average inflation rate in 2014-15. Thus, in nominal terms [real GDP growth + inflation], the growth rate is projected at 11.6%; and given the estimation of  7.4% real GDP growth in the revised series, the average inflation rate would work out to be around 4% in 2014-15. This would be music not only for ordinary citizens, but also the Reserve Bank, which is so desperately trying to rein in inflation under 6% to soften its monetary policy further. Obviously, such inflation rate does not sound credible. 

A couple of more distortions: First, based on the revised capital formation data and growth rates, India has done well for itself with more efficient use of capital. However, there are no visible indications either of investment recovery or more productive capital usage. Second, the new series suddenly reveals some distinctive shift in GDP’s structural composition – relative increases in shares of agriculture and industry at the cost of services sector under the old series. This is a contrarian trend. Besides, there are problems of using the revised data to compare India’s performance over the longer-term. Dr. Bibek Debroy, Member of NITI Ayog states thus: "any comparison with earlier series is not only difficult but impossible. We shouldn’t even try. Let’s be content with the fact that we are measuring GDP, and its different components, a little better. So, one hopes.” 

In substance, the new series of national accounts may give a sense of comfort – a psychological "feel good”, but has caused disruption in comprehension and interpretation of the data. It has created urgency for greater clarity – and that can only come from official institutions like MOSPI, MOF, NITI Ayog, RBI or statistical experts engaged in this activity. Shall we await more official enlightenment?    

SUNIL S. BHANDARE is a Consulting Economist based in Mumbai. 





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