When the statistical system gives bad news, govt tries to discredit it: Pronab Sen7 min read . Updated: 01 Dec 2019, 11:51 PM IST
Pronab Sen, director IGC India, speaks about the state of the economy, the challenge before the 15th Finance Commission and the controversy surrounding India’s statistical system
NEW DELHI : Pronab Sen, country director of the International Growth Centre (IGC), had a long and distinguished career in the government as the principal adviser in the Planning Commission, the first chief statistician of India as well as the chairman of the National Statistical Commission. In an interview, Sen spoke about the state of the economy, the challenge before the 15th Finance Commission and the controversy surrounding India’s statistical system. Edited excerpts:
The economy grew at 4.5% in the second quarter. Where do think it is headed? Has it bottomed out?
No, not yet. The effect on the corporate sector began only late last year. So we are still seeing the process unfolding. This is unlikely to bottom out for at least the next few quarters.
Do you mean to say GDP growth will go down further?
It depends. The optimistic way of looking at it is prior to the downturn that we are seeing in the GDP numbers, we knew that the non-corporate sector was doing badly but the corporate sector was doing well. Now the hope is the non-corporate sector is picking up, but my sense is that is going to take time because the financial sector is in trouble and their willingness to extend credit to non-corporates is pretty low. But it that happens, then the whole process of employment generation and consumption revival should start. But it is not going to happen in next few quarters.
For the corporate sector, the government announced the big bang corporate tax cut to revive investment. Do you think it was a mistake and the timing was wrong?
Yes, I think it was a mistake. Not that I have anything against the corporate tax cut, the question is the timing. At a time when demand is low, the government needs to step in with demand. What they have done is depending on which estimate you are going with, it is anywhere between ₹70,000 to ₹1.2 trillion on essentially giving up taxes. As far as investments are concerned, it is not going to add to investment either simply because nobody today believes that there is enough consumption momentum to support new investments. So what will end up happening at best is this tax cut will enable corporates to switch away from bank loans to finance working capital and use retained earnings for that purpose. Which means the amount of resources available in the banking sector for lending to the non-corporates will go up. But whether they lend them or not, that depends on the bank’s risk perception. At the moment, there is a huge risk aversion in the banking sector. So even if their resources are augmented, it may not move to the sectors which are demanding the funds.
What could have been the right approach?
The right approach is you have to focus on the consumption side. There are two things: One, how do you get incomes up and even more how do you get employment up, which will then generate income and then the second round effects. So far no steps have been taken in that direction.
Do you think in the upcoming budget if there is a personal income tax cut that would help?
No, again think of what we are talking about. We are still talking about the elite. As far as income tax is concerned, we are still talking about 15 million people which is very much the Indian elite. So rather than giving a tax cut, if you are willing to take that kind of a hit on the fiscal deficit, don’t do the tax cut but put the exact same amount of money into expenditure in things like PM-KISAN, NREGS, rural roads; anything that generates income at the lower level and employment.
Some income transfer is happening through PM-KISAN. Why do you think has not helped rural demand?
Because it has not happened very much. Remember PM-KISAN was announced this time last year. So you got the first two tranches out and after that nothing much is happening, although last month I believe they released some more money. The fact is you should be on hyper drive and get the money out. Why are you sitting on it? The states are screaming that you are not paying them the NREGS bills. Why do you have to give money in a corporate tax cut or income tax cut?
The 15th Finance Commission (FC) tenure as well as the reward period has been extended by one year. The terms of reference of the FFC has been controversial. What you think is the biggest challenge before the FC?
One of the things which is really worrying is the carve-out for defence. Are you actually telling the Finance Commission to take a call on how much resource our defence forces need for a five year period? This is bizarre. That’s not the Finance Commission’s job. Instead of having a two way distribution which is centre and states, now you want a three way distribution.
What the 15th FC chairman NK Singh seems to be arguing is that if the centre is providing resources through centrally sponsored schemes for things the states should be funding, why not the other way around?
But you can’t impose it, because constitutionally defence is in the union list, not in the state list. The centre can request the states to contribute but it certainly cannot order them to do so. That would be unconstitutional. The fact that the centre is getting into the state’s area is a voluntary step by the centre, the states never asked for it. They asked for money.
Do you think it will be controversial if the FC carves out a separate fund for defence sector?
In my personal opinion, it will simply be wrong. It will almost certainly be challenged by states. If you do a carve-out for defence, who gets to control the money? Do you then have some sort of a defence board in which there are states’ representatives? It will open up a whole can of worms.
After holding that the unemployment rate in PLFS (Periodic Labour Force Survey) is not comparable with earlier similar surveys, now the National Statistical Office (NSO) has junked the consumer expenditure survey. How do you see both the developments?
When the statistical system is throwing up bad news, the government either suppresses it or tries to discredit it. It is impacting not only the credibility but also the morale of the statistical system. You have been consistently questioning the professionalism of your statisticians. That’s a much more serious matter. The point is does the government have an alternative? If you don’t have an alternative, then on what basis you are going to take decisions on? Then it’s going to be what I feel rather than what is out there. It is a very dangerous precedence. Junking the consumer expenditure survey is particularly a bad idea because it is put to all sorts of other use as well. I think it is a very regressive step.
What about the argument that how come NSSO and CSO data on consumption move in different directions? How can consumer expenditure contract at a time national accounts data show huge growth in consumption?
CSO does not measure consumption directly. Consumption is measures from production side. CSO captures only the registered sectors. But remember the non-corporate sector accounts for roughly 50% of the economy and about 40% of non-agricultural GDP. In a situation of that kind, the fact that the GDP estimates are showing high consumption and the NSSO is showing contraction in consumption can be squared by saying what it implies perhaps is that the non-corporate sector has contracted. That is important information.
It is known that the NSSO data do not capture the upper income groups. People like you and me simply refuse to answer their questions. So it captures data up to the middle class. If you are seeing growth in consumption in the higher category, it will simply not appear in the NSSO survey. But that does not mean that it is not capturing data for the lower income groups accurately. When you do a consumer expenditure survey, you have to start with a list of goods and services that are consumed. Every year new goods and services are getting introduced. You can’t keep changing your questionnaire because if you do, then you start getting non-comparability. So quite often what will happen is people will forget they bought something unless a specific question is asked. There is one item in the survey which is ‘miscellaneous not included elsewhere’. That is the fastest growing part in the survey. The problem is already the survey for every household takes about two and half hours. If I extend that list, it will take three hours. People get tired, they get irritable and at some point they kick the field investigator out. And this is true across the world. The important thing to recognize is that the NSSO consumer survey is very accurate measure what is happening to consumption up to the middle class and not above the middle class. Second is the survey may not be able to pick up a large number of items which have been introduced later.