Misleading growth figures won't help Indian economy
The past one week has been full of economic and political squabbles and oddities.
In a first Jay Shah’s historic economic boom, with his company’s assets burgeoning from Rs 50,000 to a massive Rs 80,00,00,000 as reported just a couple of days ago, is part of the flavour of the day. Since the junior Shah is Modi confidante Amit Shah’s son, the matter is highly political after its exposure by The Wire. No matter what's the outcome, it's unlikely that there won't be similar oversights involving such massive capital growth. Another serious issue is that of the additional solicitor general defending Jay Shah, who is a mere civilian and not a government servant, and as such not entitled to government counsel.
Unfortunately, the bad news is compounded by grim estimates by international agencies about India’s GDP growth. Like many Indian economists, the Asian Development Bank, World Bank and IMF have all noted that the demonetisation and GST have cut into the GDP growth in India. The earlier projections by the ADB during 2017-2018 was 7.4 per cent GDP growth, going down most recently to 7.0 per cent. Similarly, the earlier projection of the World Bank of 7.2 per cent of GDP growth has dipped to 7.0 per cent. The IMF has reduced its earlier forecast from 7.2 per cent to a low of 6.7 per cent. In its World Economic Outlook, the IMF was quite frank about India’s economic prospects:
“The growth projection for 2017-18 has been revised down to 6.7 per cent, reflecting still lingering disruptions associated with the currency exchange initiative introduced in November 2016, as well as transition costs related to the launch of the GST in July 2017.”
While the IMF projected average inflation to ease from 4.5 per cent in 2016-17 to 3.8 per cent in 2017-18, this has proved to be an optimistic estimate. The retail price inflation has risen in July and August in India. The Consumer Price Index-based inflation rose from 1.46 per cent in June, to 2.36 per cent in July, and then further to 3.36 per cent in August.
In China and India, real per capita GDP grew by 9.6 per cent and 4.9 per cent a year respectively, during 1993-2007. But the median household income is estimated to have grown less - by 7.3 per cent a year in China and only 1.5 per cent a year in India. So earlier estimates of India economic growth catching up China, if not surpassing it, have turned out highly optimistic and unfounded projections. Even more serious are the projections by the international banks that the median growth rates in India and China are considerably higher than matching gains for the majority of the population.
Economists have long warned of the need to have targeted policies for generating income and employment for the mass of the population, with insufficient effect. This is an extremely important issue.
Statistics have also come up in internal debates in India about the faltering economy. Responding to Surjit S Bhalla, the newly appointed member of the Economic Advisory Council to the prime minister, Pronob Sen, former chairman, National Statistical Commission, and principal economic adviser, Planning Commission, points out that, Bhalla agrees that the (economic) slowdown is "a self-inflicted... wound" resulting from "the exorbitantly high real interest rate policy followed by the MPC".
"This is clever since it simultaneously absolves demonetisation/GST from blame, and shifts the responsibility from the government to the RBI. The 'evidence' he provides is on increase in real interest rates during this government’s tenure compared to: (a) Sinha’s tenure as finance minister; and (b) major emerging markets."
As Sen points out, neither of the two last “facts” are relevant to Bhalla’s argument.
In another argument, Bhalla to exonerate the government for the slowdown, uses rural real wage rates of ploughmen and carpenters to argue that there is no fall in labour demand in the country post-demonetisation. This argument has been completely exposed by Dr Himanshu on grounds of "cherry-picking". He conclusively shows that Bhalla is selectively, and wrongly, picking certain economic data in order to prove his untenable defence of the government’s economic policy.
The really serious problem in such economic debates is that the basic argument is already decided in advance. Pro-government economists: (a) often go overboard to rebut critiques of government policies, even if criticism comes from international agencies: World Bank, IMF, ADB, etc; (b) sharply criticise those who question the Modi government’s economic policies, for example, Yashwant Sinha, Arun Shourie.
No wonder the needed economic policies and structures will not be allowed to be debated seriously in this kind of distorted discourse.
Also read: How GDP and GST failures are making India's middle class pay