The latest cuts in India’s growth forecast by international agencies should remind policymakers that headwinds against the economy are on the rise. The World Bank and Asian Development Bank have slashed their forecasts of the country’s growth in gross domestic product (GDP) this year to 7.2%, while the International Monetary Fund (IMF) has made a prediction of 7.3%. This pace is higher than projections for all other major economies, so one may wonder why anyone should worry at all. However, a look at the growth trend in 2018 shows that the picture is far from rosy. Official Indian GDP growth dropped from 8.2% in the three months through June to 6.6% in the quarter ending 31 December and is expected to slide further to about 6% in the first quarter of 2019. Other economies are also slowing as the world heads for a slump. As IMF chief economist Gita Gopinath noted: “This is a delicate moment." In all this, the message for India is clear: we must get our act together before the economy takes a turn from bad to worse.
While India has initiated some significant reforms in recent years, their implementation has left a lot to be desired. After years of delay, for instance, the government rolled out the Goods and Services Tax (GST) in mid-2017, but its structure remains much too complex, which defeats the purpose of simplifying taxation. Plus, GST compliance is too difficult for many assessees and its input-credit system lacks clarity. As for loan recovery, bankruptcy process reforms now seem rather too clumsily executed. Some good work has been done on cleaning up the balance sheets of state-run banks, but issues of their governance have been left unaddressed. The monetary policy framework of the central bank has been a rare success, even if it hasn’t fully been tested on inflation yet. The IMF, on its part, advocates reducing public debt, easier hire-and-fire rules to incentivize job creation, and land reforms to speed up infrastructure development. Under the political circumstances, however, the prospects for such an agenda look bleak.
Of greater urgency is reversing the trend on India’s data credibility. After Raghuram Rajan, now IMF’s Gopinath seems to have called India’s GDP data into question, asking for “transparent communication" on its calculation and pointing out that decision-makers across the world are watching our economy closely. The 2015 overhaul of the computation was aimed at aligning it with international best practices of measuring value addition, but an array of other indicators have signalled a weaker economy than official GDP numbers suggest. In an interview with a television channel, Gopinath drew attention to the “deflator" being used by statisticians to arrive at real growth. This is the figure by which the nominal growth rate is lopped off to account for price inflation. If the deflator that is applied does not properly reflect actual price changes in an economy, then it could deliver a mis-approximation of reality. It’s about time, then, that the details of how the deflator has been calculated are disclosed for independent analysis. Perhaps the government could appoint its own panel of well-reputed statisticians and economists from around the world to crunch the numbers and validate the results. Such openness would help quell criticism of the 2015 shiftover. GDP data is the bedrock of sound policymaking. It is a vital input for economic management. Poor quality data would result in ill-informed decisions on what ails the economy.