Is economy growing at 7-8%?

Is economy growing at 7-8%?

True Lies: Is India the new China in manipulating economic data, the world’s asking

During a television interview just after the Union Budget announcement on February 1, Mark Mobius, the famous investor, chose to talk more about India’s statistical data issues than about the Budget numbers. He expressed shock at the sharp revision in GDP growth numbers. “The Indian government should be transparent and open all its books to the public,” Mobius said.

The official Central Statistical Organisation (CSO) data now pegs India’s GDP growth in 2016-17, the year of demonetisation, at 8.2%, a whopping 110 basis points higher than the previous estimate. Growth in FY18 at 7.2 per cent is now 0.5% higher than previous estimate. The nominal GDP in the same year is revised up by 1.3% despite the inflation remaining benign.

The consensus view is that the economy was already losing steam by the first quarter of FY17 and demonetisation in November 2016 intensified the slow-down. There are various ground reports on the significant pain and job losses in the informal sector due to demonetisation that fed into the formal sector. But the new official estimate claims that India grew the fastest since 2011-12 in the year of demonetisation!

Such drastic data revisions have led foreign investors to question the credibility of India’s statistical data. Some have even expressed concern whether India is the new China in manipulating its official data.

Revision of economic estimates is natural as new data becomes available. But it becomes worrisome when the revisions are so sharp that an economy that was believed to be slowing down suddenly gets tagged as fastest growing. This can lead to serious policy blunders.

The RBI report published last year states, “India’s multiple revisions of GDP growth estimates are “confusing,” much less provide a true state of the economy”.

The CSO had announced a new GDP series in 2015 with a new base year (changed to 2011-12 from 2004-5) and a new methodology. However, the back series for the new series was not published. Without a back series, the data was available only since 2011 and it was difficult to understand the trend of the economy.

Finally, in July 2018, a special committee under the National Statistical Commission (NSC) released GDP back-series showing that economic growth, as expected, was much higher during the 2004-2008 boom period. The GDP growth had crossed 10% not once but twice – in 2007-08 and 2010-11. The opposition did not lose any time in taking credit for higher growth rate during the UPA regime.

Strangely, soon after, the July back-series was labelled as “only experimental and not official”. The final GDP back-series published later showed growth to be much lower during the UPA regime, and that during the last four years to be much higher. This new series caught both economists and analysts by surprise as it contradicts almost all other data on the real economy, like car sales, investment, credit growth, tax revenues, etc. The politicization and GDP back-series flip-flop undermines the credibility of Indian statistical data.

Moreover, the fact that the back-series was announced by Niti Aayog, and not by the CSO, prompted many to question the authenticity of the data. Former chief statistician of India Pronab Sen said, “It’s a clear shift that NITI Aayog got involved in the generation of the new series. One gets the suspicion that it was not done by professional statisticians.” Sen criticised the methodology, too. For example, he said, the earlier method looked at the number of telecom subscribers, but the new series looks at number of air minutes consumed. The sharp criticism has pushed Niti Aayog to promise to look at the back-series again.

According to the new back-series, the economy grew at an average 6.7% during four years of UPA-I (2005-6 to 2008-9) and the five years of UPA-II (2009-10 to 2013-14) -- lower than the earlier average estimates of 8% and 7% (2004-5 as the base year) respectively. These growth rates are lower than the average 7.7% growth rate (new series) seen during the first four years of the Narendra Modi government. The growth during the boom year of 2007-8 now stands downgraded from 9.8% to 7.7%. Unbelievably, this is lower than the 8.2% growth rate claimed for the year of demonetisation!

It is found that the sharp scaling down of GDP growth rates during FY2005-8 does not reflect the trend in some key economic activities on the ground. For example, the average annual growth in car sales between FY05 and FY08 was 14.7%, while it was just 4.1% between FY15 and FY18. Two-wheeler sales growth was 9.8% and 8.1%, and commercial vehicle sales 19.1% and 7.9% respectively during those two periods.

The average growth in non-oil exports stood at 22.3% during FY05 to FY08, which slowed to a mere 1.6% during FY15 to FY18; credit growth was at 29.6% versus 9.5% in the two periods; corporate tax collection grew at an average 32% in the first period, compared to 9.4% in the second; tourist arrivals, cargo handled at major ports, rail freight, etc., all point at higher economic activity during FY2005-08 compared to FY2015-18. Foreign tourist arrivals grew at 17% between 2004-07 (calendar year) against 9.4% between 2014-2017; cargo handled at major ports grew at 10.8% between FY2004-05 and FY2007-08 and at 5.2% between FY2014-15 and FY2017-18; rail freight traffic (revenue earning) grew at 9.2% versus 2.5% in the two periods respectively.

Clearly, the estimated GDP values are not consistent with other related variables. Hence, the doubts over the veracity of the back-series remain.

Time to clean up

The government has access to large sets of data in the economy and has the bandwidth to collect the data, collate it and publish estimates. No independent researcher can collect all this data. In a large, complex country like ours, with an equally large and intertwined informal sector, measurement errors are inevitable. However, any growth data should be in line with other data on ground-level economic activity. Researchers can only check and point out inconsistencies in the data but cannot claim that the data put out by government statistical agencies are wrong.

The recent resignation of two non-government members of the NSC over alleged suppression of unflattering jobs data complicates matters further. The NSSO survey on jobs data that shows a record 45-year high unemployment rate should be made public. If there are problems in the methodology, those should be discussed, debated and corrected, instead of sweeping the whole report under the carpet. If our growth rates are revised to show enviable expansion of the economy, jobs must have been generated.

The latest data on the ground does not paint any pretty picture. Private investment has not picked up meaningfully. New and completed projects in the quarter ending December 2018 have declined while shelved or abandoned projects have increased. It is worrisome that private consumption had also moved lower in the quarter ending September 2018 due to sluggish rural wage growth.

It is expected to have slowed further in the December quarter due to tighter liquidity conditions in that period. In all probability, GDP growth rate in the December 2018 quarter will be lower, but there is no guarantee that it will not be revised higher later.

It is important for the CSO to make the whole process more transparent, get the new GDP series vetted by statistical experts and economists. Unreliable statistics can be problematic for a capital-deficient emerging economy like India as it can easily send conflicting signals and lead to loss of trust among international investors. The devil is in the underlying data. Credibility is hard-earned over many years, but it can be lost in a moment.

(The writer is a research scholar at Indian Institute of Foreign Trade. Views are personal)