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A statistical witch-hunt

GDP is a measure of the value addition, not output. The problem lies there and not in CSO’s advance estimates
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First Published: Sun, Feb 17 2013. 09 59 PM IST
The real issue which economists need to focus on is why after decades of economic planning, the concept of increasing value addition is no longer valued by the market.  Photo: Priyanka Parashar/Mint
The real issue which economists need to focus on is why after decades of economic planning, the concept of increasing value addition is no longer valued by the market. Photo: Priyanka Parashar/Mint
It was disturbing to read how the czars of economic policy ganged up against the Central Statistical Office (CSO) and rubbished its advance estimates of gross domestic product (GDP) growth at 5% in 2012-13. The all-round attack on the CSO’s forecast can only be a measure of the desperation, or an indication of ignorance, or both.
Chief economic adviser Raghuram Rajan saw the problem in CSO’s estimate due to the inability of past data in capturing turning points. Rajan can be pardoned, but what about veterans such as Montek Singh Ahluwalia? He rubbished the data along similar lines, adding that the CSO has not actually addressed the question of the economy bottoming out.
Even more serious is his observation that CSO only has access to some production data and some credit data and as such, is not a “very reliable way of looking at the situation”. This is an extraordinary observation.
The sources and methodology adopted by the CSO are laid out by the System of National Accounts 2008, the latest version of the international statistical standard for national accounts, adopted by the United Nations Statistical Commission (UNSC).
Its scope and coverage are consistent with internationally accepted standards and guidelines. The production boundary and the asset boundary of India’s national accounts are in line with, and meet, all the recommendations of the Inter Secretariat Working Group on National Accounts set up by the UNSC.
In this context, it will be enlightening to know which system of national accounts in the world is not based on past data. Also, what other data can official national accounts possibly be based on? Sure, some forecasters may use leading indicators but then those cannot be used for generating official national accounts of a country.
As regards the inability to capture turning points, this is true of any forecast anywhere in the world. No forecast has the ability to predict the timing and points of inflection.
It also needs to be taken into account that the advance estimates for GDP are not just one number but forecasts of national income and expenditure by type of economic activity. All these have to be internally consistent and cannot be based on one or a set of leading indicators.
It is quite possible, though highly unlikely, that the some leading indicators are suggesting a turnaround. But that in no way goes against the CSO estimate, which is based on actual data till November 2012. The leading indicators can be used to interpret data generated by the CSO but cannot be used to condemn the numbers themselves.
Equally, the “guidance” given by the ministry of finance does not inspire confidence. On 8 February, while rubbishing the CSO’s advance GDP estimates, the ministry indicated stabilization in the Index of Industrial Production (IIP) since October. And this was one of its reasons for positive beliefs.
However, just four days later when the IIP figures were released, these actually showed a worsening situation in November and December. In December, the IIP fell by 0.6% on a year-on-year (y-o-y) basis while for November, the IIP was revised down by -0.8% compared with -0.1% announced earlier.
Compare this with the track of the CSO. A comparison of the advance estimates and the revised estimates given by the CSO since 2005-06—ironically circulated by the finance ministry—shows the difference between the two has never been more than 0.4 percentage points. The highest downward revision was in 2008-09, a year of global turbulence.
In other years, such as 2010-11, for instance, the advance estimate was 8.6% and the revised one stood at 8.5%. One would like to see which private analysts can claim of such accuracy?
The real issue which economists such as Rajan and Ahluwalia need to focus on is why after decades of economic planning, the concept of increasing value addition is no longer valued by the market.
If profitability is a signalling device for resource allocation and investment in a market economy, then the unambiguous signals emanating from the Indian economy are that raw material production is more valuable than finished goods.
Or, to put it simply, in the current situation, the raw material or input is more “valued” than the final “value-added” product. Indeed, the profitability of manufacturing enterprises in the basic and intermediate goods sectors has been reduced to an arbitrage on the input prices.
In many sectors, income generation in the process of manufacturing is no more than 2-3% of the total cost of producing. Almost 75-80% of the total cost of production is accounted for by raw materials. Till five years ago, raw materials accounted for no more than 20-25% of total costs.
The macroeconomic worry is that the value addition-to-output ratio is on a secular decline. And, going back to the basics, at the end of it all, GDP is a measure of the value addition, not output. The problem lies there and not in the CSO’s advance estimates.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com
To read Haseeb A. Drabu’s earlier columns, go to www.livemint.com/methodandmanner
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First Published: Sun, Feb 17 2013. 09 59 PM IST
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