The Q1 setback may have redeemed our data in critics’ eyes and rallied opinion for another stimulus
As per popular interpretations, the Indian data on gross domestic product (GDP) released on 31 August was full of dark clouds. Real GDP, as measured at constant 2011-12 prices, shrank 23.9% from a year ago. Nominal GDP had shrunk 22.6%. I was searching for a silver lining to the data. Some commentators saw agriculture and rural consumption as bright spots. Sure, they are. However, analysts have cast doubts on their sustainability by pointing to rising covid infections in rural India. There must be something else to cheer about. And I’ve found it.
It is that the steep GDP contraction has restored the credibility of India’s macroeconomic statistics. Detractors of the government, critical commentators and opposition politicians seem to trust the latest GDP figure because it has delivered them ammunition. They seem almost pleased that the Central Statistics Office (CSO) has given them a number that the chief economist of the International Monetary Fund has certified as the worst among the G-20 nations for the April-June quarter. As long as it showed brisk GDP growth, the CSO was suspect in their eyes, but by presenting one of the world’s steepest contractions, it has redeemed itself.
It reminded me of how participants in financial markets tend to view central bank transparency and predictability. As long as central banks surprise them with rate cuts and abundant liquidity, surprises and non-transparency are welcome. However, surprise rate increases or monetary tightening are unwelcome and taken as reflective of their opacity and bad behaviour. The response to GDP data is similar.
By now, it should be clear that the estimated real GDP growth rate of around 8.2% in 2016-17 was not political but methodological. As former chief statistician Pronab Sen pointed out, using the growth rate of the formal sector, which benefited from demonetization, to estimate informal and rural sector growth yielded a strange result for that year. Demonetization had affected only the informal sector adversely. Since the shock was idiosyncratic and not general, gauging its impact required a different method. That was not on offer. So, policymakers of all hues—fiscal and monetary—were blindsided. That they should have applied their own methods and set monetary policy and fiscal policy accordingly is a matter that does not get as much critical attention as the note-replacement exercise itself.
When the history of India’s economic growth since 2014 is written, more than demonetization, the left field’s statistical self-goal of accepting 8.2% GDP growth for 2016-17 will figure rather prominently. That is history. The CSO numbers are trustworthy now. The office was already on its way to redeeming itself in the eyes of the critics when it estimated GDP growth in the fourth quarter of 2019-20 at 3.1% and the full-year growth rate at 4.2%. All that remains for it to regain full credibility is to explain better its downward revisions of growth between 2005 and 2011.
Now that the full effects of the extensive and stringent lockdown imposed in March are evident, the government and Reserve Bank of India (RBI) have to concede that whatever they have done to help stabilize the economy since then may not be enough. Yes, the latter has done a lot. But, it can do more. Without it, we risk hysteresis in the economy, as Rahul Bajoria and I wrote in these pages (‘A risk-management approach could guide our next stimulus’, 27 July 2020).
It is a fact that nine major emerging economies have seen a sharp growth contraction between 2010 and 2019, though they did not do demonetization, nor introduce a goods and services tax and bankruptcy code. But that does not and should not mean that we wash our hands of the growth problem. Such explanations do not satisfy critics. Also, economic growth is a strategic imperative for India, given the changed border dynamics. India needs fiscal resources that only growth can provide. For that, it has to be prepared to spend first.
The government has already announced additional market borrowings for the year and also enhanced debt limits for states. Further market borrowing might bring additional costs rather than benefits. Therefore, RBI should not be squeamish about monetizing new government debt, as Srinivas Thiruvadanthai and I wrote some time ago (‘India should give up the fear of inflation and monetize its deficit’, 20 July 2020). It should commit to monetizing 2% of GDP (2019-20) right-away.
RBI has been doing an admirable job of supporting the government’s fiscal operations through several methods. However, announcing a clear one-time purchase of treasury securities would provide the Centre certainty on resource availability, which slow and steady open market operations, yield curve management and re-classification of bonds held by banks won’t achieve. This is critical in these times of strategic uncertainty. India needs flood irrigation now, and not drip irrigation.
If this “act of God" or “leak from the lab" resulting in a 23.9% GDP contraction is not sufficient ground for deficit monetization, then the exceptional clause in the Reserve Bank of India Act for monetising fiscal deficit is pointless. It can be scrapped.
V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.