Even before the back-series calculations were unveiled, there had been several unanswered questions on how the economy has been faring since 2011
Barely had the dust settled on the clashes between the government and the Reserve Bank of India,the next one has erupted. Now, it is about the gross domestic product (GDP) back-series data up to 2004-05 based on 2011-12 base year and the new methodologies. In August, the committee on real sector statistics, one of the five committees constituted by the National Statistical Commission, had calculated that the real GDP growth rate for 2006-07 was 10.08% under the new series (base 2011-12). Under the old series (base 2004-05), the reported growth rate was 9.26%. Further, the committee estimated the growth rates for 2007-08 and 2010-11 at 10.23% and 10.78%, respectively (vs 9.8% and 10.26% reported earlier under 2004-05 base). Double-digit real GDP growth in three of the 10 United Progressive Alliance (UPA) years was a source of jubilation in the Congress camp. From the government’s side, these numbers were called preliminary.
On 28 November, the Central Statistics Office presented the final revised GDP growth numbers for 2004-05 to 2011-12 (base 2011-12). The real GDP growth rates for 2006-07, 2007-08 and for 2010-11 are 8.1%, 7.7% and 8.5%, respectively. Double-digit growth rates have vanished. If not double-digit growth rates, at least, earlier, the Congress used to bask in the three back-to-back years of 9%-plus growth rates from 2005-06 to 2007-08. That is gone too.
By Indian standards, the years between 2003 and 2008 were ‘Great Gatsby’ years. Capital inflows from abroad were plenty; stock markets boomed; investment and savings rates were rising. A 9%-plus growth rate appeared plausible. After the revisions, real economic growth rates between 2005 and 2008 are barely above 8%. So, it might be difficult to argue that the economy was in an unsustainable boom then. Of course, the counter-argument is that the growth rate estimates are now lower because the contribution of the tertiary sector is consistently lower than previous estimates because of methodological changes and that the economic boom was unsustainable, driven by capital inflows pre-2008 and by lax fiscal and monetary policies, post-2008. After all, India’s inflation rate had begun rising sharply from 2006 onwards as did the current account deficit.
It is a fact that high economic growth pre-2008 was not because of but despite the policies of the Congress or the UPA. In truth, the consequences of their policy omissions and commissions visited on the country from 2011 onwards. The country paid a high price for economic overheating that its policies generated—double-digit inflation rates for five years up to 2014, rising and high fiscal and current account deficits, plunging rupee and bad loans in the banking system. The last one is still with us.
The Congress is silent on these but vocal in protesting that the growth rate revisions are not statistical but politically tactical because the average real GDP growth rate from 2014 until 2018 now exceeds the average real GDP growth rate between 2004 and 2014. This is where optics matters. Having the vice-chairman of Niti Aayog and not the country’s chief statistician present these numbers did not help remove doubts that this was a political and not a statistical exercise.
It is difficult to replicate the calculations and verify the growth numbers because several assumptions lie behind the calculations. Assumptions and extrapolations take on a much bigger role in a data-deficient country like India. One can only check if these numbers are broadly in line with other anecdotal and high-frequency data. On that basis, these revisions do not quell doubts but keep them alive. Not just with respect to the period between 2004 and 2012, but afterwards too.
Even before the back-series calculations were unveiled, there had been several unanswered questions on how the economy has been faring since 2011. The estimated growth rates since 2011 are still too high, when compared with other data on economic activity, such as sales of commercial vehicles, purchasing managers’ indices, RBI industrial outlook surveys, mobile phone subscribers, air freight, and air passenger traffic. The overstatement of growth is more egregious between 2011 and 2014. For instance, purchasing managers’ indices and industrial outlook— both current and expectations—fell off the cliff in 2011 and remained depressed until 2014. Therefore, the Congress has to be grateful that the post-2009 data still do not capture adequately its gross economic mismanagement.
The government, on its part, should note that the recovery of the real economy since 2014 has been only patchy at best. It failed to gauge the severity of the problems that it took over in 2014. It underestimated the bad debt problem in banks. Second, India’s capital formation and savings rates have come down. The slide in fixed capital formation—due to the heavy debt load in the balance sheets of banks and companies—has been partially offset by the rising private consumption share of GDP. As a result, household savings rates have dropped 8 percentage points since 2004. This is not a healthy economy. The government should acknowledge that. Finally, the government should decide whether it wants to pride itself on presiding over the fastest growing large economy or if it wants the central bank to follow the crisis-era policies of Western central banks to help a structurally damaged Indian economy recover. It cannot have it both ways. It has to choose.
V. Anantha Nageswaran is the dean of the IFMR Business School. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk.