One interesting thing in the Economic Survey 2020 is that chief economic adviser (CEA) Krishnamurthy Subramanian has devoted an entire chapter in the survey to play down the questions raised by his predecessor, Arvind Subramanian on the accuracy of the country’s GDP estimates under the new series.
In 2019, Arvind Subramanian had triggered a controversy arguing that he has evidence to show India’s new GDP series is flawed and grossly overestimated by at least 2.5 percent. Subramanian cited several economic indicators between the period between 2011-12 and 2016-17 to validate his argument.
The former CEA later, in a study, had said that the evidence, based on disaggregated data from India and cross-sectional/panel regressions, is robust to prove his argument. “Lending further credence to the evidence, part of the overestimation can be related to a key methodological change, which affected the measurement of the formal manufacturing sector,” Subramanian had said.
But, in the economic survey 2020, CEA Krishnamurthy Subramanian strongly counters this argument.
“The analysis in the chapter clearly shows that the evidence in favour of an overstated Indian GDP disappears completely in a correctly specified econometric model,” he says, adding, “Using a cross-country, generalized difference-in-difference model with fixed effects, the analysis demonstrate the lack of any concrete evidence in favour of a misestimated Indian GDP,” the CEA says.
These observations are significant given the fact that Narendra Modi government had faced severe criticism both within India and abroad over the protruding disconnect between the official GDP numbers and what the high frequency macroeconomic indicators showed on the ground. Even the International Monetary Fund had raised questions on the quality of India's GDP calculation methodology.
The economic survey has projected a 6-6.5% GDP growth for 2020-21. But, there will be much skepticism on this number given that in the last survey, the GDP growth was originally projected at 7% (later it was revised downwards) whereas the actual growth is likely to end up around 5 percent. Hence it is only logical that this year’s prediction will be accepted by economists with a pinch of salt.
The message from the survey to the government, fighting an economic slowdown, is to loosen the purse strings and do what is needed at this point--spend as much as possible. The government will have to prioritise growth and not fiscal consolidation,the survey says. The question is whether the government shares the same view. We will know that tomorrow when Union finance minister Nirmala Sitharaman unveils the budget document tomorrow.
So far there are no indications from the government that it will significantly step up spending to support growth. It is more worried about deviation from the fiscal roadmap. The survey also cautions the government on slow pace of governance reforms in the state-run banks.
All eyes on budget
As this writer argued in an earlier column, economic growth is dragged by a poor show in the manufacturing sector, lower revenue collections hampering the ability of the government to ramp up spending and the absence of consumer demand. Worsening global conditions add to the woes. There is a likelihood of economic growth falling further since government spending, which has been aiding growth in recent quarters is unlikely to continue in the last quarter on account of the government’s tight financial position. It is in this backdrop that Sitharaman will present her budget tomorrow.
If one looks at data, growth in private consumption has fallen sharply over the last five quarters. In the second quarter, it grew by just 7.8 percent compared with 14.4 percent in the same quarter of the previous fiscal year. Compared with this, government consumption has stayed at nearly the same level 15-18 percent in the last twelve months. The high government spending was essentially supporting GDP growth. But, as mentioned above, it is doubtful if the government can maintain this momentum in the months ahead due to a revenue shortfall.
Over to the FM now.