The new data released on November 28, downgraded UPA years' GDP growth rates by shaving off the previous estimates by a few percentage points in several years. On this podcast, we will try and understand the ramifications.
The election season is upon us and as is the unrelenting news cycle to remind us that there are no quiet days in the increasingly mercurial world of politics.
One of the latest events to jolt media watchers is NITI Aayog and the Central Statistics Office's (CSO) release of the 'back-series' of India's gross domestic product (GDP) data from 2005 to 2006. This was done using a new methodology which changed the base year to 2011-12, but more about that later.
The result? The new data released on November 28, downgraded UPA years' GDP growth rates by shaving off the previous estimates by a few percentage points in several years.
On this Moneycontrol podcast hence, we will try and understand the ramifications of this development.
On the surface, as Gaurav Choudhury reported in Moneycontrol, the report conveys that the Indian economy did not grow at the pace during the UPA regime as it was earlier made out to be.
Claims that this methodology to gauge past GDP growth rates was much better were made by Rajiv Kumar, Vice Chairman of the government’s policy think-tank NITI Aayog.
He said and we quote, "The new series (2011-12) is far more superior and has made some significant methodological improvements." He also added that the government had consulted experts such as a member of the monetary policy committee Chetan Ghate, former chief statistician TCA Anant, among others.
At the heart of the controversy caused by the revised numbers was the debunking of a previous estimate that India had clocked double digit growth of 10.3 percent in 2010-11. The new estimate has revised this to 8.5 percent. And as Moneycontrol reported, the revision has reduced GDP growth rates of 9.3 percent, 9.3 percent and 9.8 percent in 2005-06, 2006-07, 2007-08 respectively, to 9.9 percent, 8.1 percent and 7.7 percent respectively. As mentioned in the Moneycontrol report, in 2008-09, growth declined to 3.9 percent due to the global financial crisis. However, new estimates show that the growth rate was overestimated and economy actually grew 3.1 percent.
Finance Minister Arun Jaitley also stepped in to defend the revised GDP numbers for UPA era and said CSO was a credible organisation. He said, "I don't think any service is being rendered by people who choose to discredit a highly credible organisation like the CSO because its data is based on facts and the revised formulations which is a continuous exercise because every time you try and improve upon the formulations to make them more representative of the real state of economy". Unquote.
Moneycontrol also cited government officials involved in the compiling of the new data who say that the earlier series did not capture financial services value addition in its entirety. It captured only a few mutual funds (primarily UTI) and estimates for the Non-Government Non-Banking Finance Companies as compiled by RBI, apart from banking and insurance activity.
CSO said in a release and we quote, "The methodology for preparing the back-series estimates for the years 2004-05 to 2010-11 is largely the same as the methodology followed in the new base (2011-12). In certain cases, owing to the limitations of the availability of data, either splicing method or ratios observed in the estimates in base year 2011-12 have been applied." Unquote.
Chief Statistician Pravin Srivastava was quoted by various news sources that the revision of GDP back series data is a robust one, with the methodology now being comparable to how other countries crunch data.
In the new series, the coverage of the financial sector has been expanded by including stock brokers, stock exchanges, asset management companies, mutual funds and pension funds, as well as the regulatory bodies, SEBI, PFRDA and IRDA.
We quote Moneycontrol, "This probably explains the sharp drop in growth rate to 3.1 percent in 2009-10, mirroring a deeper impact of the global financial crisis of 2008 on the Indian economy that previously thought. In January 2015, the CSO had released a new set of national accounts, revising the base year from 2004-05 to 2011-12. In the new series, the GDP at factor cost was replaced with Gross Value Added (GVA) at basic prices was adopted, as per an international standard." Unquote.
A credible method?
The new method, says multiple new sources, adopts a gross value added (GVA)-based approach as compared to a pre-dominantly volume-based calculation.
Further, as the piece explains, the base year of the national accounts is the year chosen to enable inter-year comparisons. It is changed periodically to factor in structural changes in the economy. The new series , as we told you before, changes the base to 2011-12 from 2004-05.
We quote again, "The base year is important in GDP calculation as factors such as purchasing power and enables calculation of inflation-adjusted growth estimates. Importantly, the new series uses National Sample Survey Organisation's 2011-12 establishment survey to calculate trading income, compared to the 1999 survey data used in the earlier series." Unquote.
The recalibration of the previous government's economic report card just before elections has had its share of critics and the opposition, primarily Congress has accused the government of manipulating the GDP data of previous years for political gain and in a desperate attempt to undermine India's growth story over the last 15 years.
Congress chief spokesperson Randeep Surjewala termed the step a "classic" case where "the operation is successful but the patient is dead". Unquote.
Said Randeep Surjewala and we quote, "Modi Government and its puppet Niti Aayog want the people to believe that 2+2=8. Such is the gimmickry, jugglery, trickery and chicanery being sold as 'back series data.’" Unquote
Calling the new GDP, as "Gimmickry Data Product', the Congress leader said the economic mismanagement created by demonetisation, and what he termed as a "flawed" GST and "tax terrorism" had led to economic anarchy. And this had led to what he called was a malicious and fraudulent jugglery of GDP to hide the enormous body blow caused to India's economy.
The real blame he said could be attributed to and we quote, "Modinomics plus a Pakoda economic vision." Unquote.
Just goes to show how frayed political tempers are at this junction with the general election only a nudge away.
Surjewala also alleged that since May 2014, there had been a determined effort to disparage the record of the two UPA governments under Manmohan Singh during 2004-2009 and 2009-2014.
Changing the base year from 2004-05 to 2011-12, was part of the same strategy, he said.
We quote, "Congress had demanded that the back series data of GVA and GDP should be calculated and released so that meaningful comparisons can be made." Unquote. He added that the back series data as released by National Statistical Commission (NSC) in August 2018 is available in public domain and numbers prove that the truth cannot be suppressed.
He also claimed that the UPA-1 and UPA-2 delivered the highest decadal growth of 8.13 percent at factor cost since independence and during this period 140 million people were lifted out of poverty. Adding also that by the time the UPA left office, economic growth had recovered to 6.39 percent at market prices in 2013-14, the fiscal deficit had been reduced to 4.48 percent and the current account deficit contained at 1.7 percent.
He was also quoted by multiple sources that the revised ‘New Series' by the Ministry of Statistics and Niti Aayog had undermined the NSC (National Statistical Commission), the autonomous body for deciding data transparently and in accordance with global standards of calculating GDP as per Market Price Linked Methodology.
We quote, "Today, the Modi government deceived the country by surreptitiously changing the methodology in order to manipulate GDP data. This is called ‘Excel Sheet Management' i.e deciding the result first and filling the marks later. The new methodology is GVA based, which does not take into account tax+ subsidies and consequently is extremely flawed to sub serve the myopic interests of the Modi government." Unquote.
Senior Congress leader and former Union finance minister P Chidambaram also said that the revised GDP numbers released by the Niti Aayog were a 'hatchet job' and termed it a 'joke'.
The NITI Aayog Vice Chairman Rajiv Kumar though has stated the government had no intention to mislead or do something purposefully which did not reflect the reality.
Decoding the complexity
For those feeling confounded by the numbers in the controversy, Moneycontrol's Gaurav Choudhury broke down some of the terms being used in the arguments. And we present that piece partially.
What is GDP?
Gross Domestic Product or GDP represents the total value of all the final goods and services that are produced within a country's borders within a particular time period, typically a year or a quarter.
Real and nominal GDP?
Nominal GDP is calculated at current prices. Real GDP is GDP adjusted for inflation.
What is a “base year”?The base year of the national accounts is chosen to enable inter-year comparisons. It gives an idea about changes in purchasing power and enables calculation of inflation-adjusted growth estimates
When was the new series launched?
A decision to change the GDP calculation method was taken during the UPA-II years. The NDA government launched the first set of data, giving out levels of GDP and growth rates from 2011-12.
What is Back Series?
The back series data serves as a link between the old and new formulae. The back series is aimed at calculating/updating national accounts using the new formula to help allow inter-year comparisons and enable better economic forecasting.
Vivek Kaul, the author of the Easy Money Trilogy wrote a piece in Firstpost to address the controversy.
And we quote him, " The biggest takeaway from this exercise is that the economic growth between 2004-2005 and 2011-2012, and the economic growth between 2011-2012 and 2017-2018, was more or less the same. Between 2004-2005 and 2011-2012, the Indian economy grew at 6.89 percent per year. Between 2011-2012 and 2017-2018, it grew at 6.87 percent per year, which means there was barely any difference. For anyone who has lived through these two periods, this just doesn’t feel right." Unquote.
Another point he makes is that if the Indian economy grew at more or less the same rate between 2004-2005 and 2011-2012, as it did between 2011-2012 and 2017-2018, then this should reflect in other ‘real’ economic indicators as well. We quote, "The GDP number is ultimately a theoretical construct and that being the case, the way it goes, should also be reflected in the high speed ‘real’ economic indicators like car sales, two-wheeler sales, tractor sales, commercial vehicle sales, non-food credit, corporate tax, personal income tax and a whole host of other economic indicators." Unquote.
He cites multiple indicators to claim that the economic growth between 2004-2005 and 2011-2012 should have been much higher than the economic growth between 2011-2012 and 2017-2018. But as per the new GDP series, this is clearly not the case. He says, "Given this, the new GDP series does not pass this basic smell test." Unquote.
What does make sense is that excessive lending between 2004-2005 and 2011-2012, led to a huge amount of bad loans in the years to come, especially for public sector banks. This to some extent has held growth back, post-2011-2012, he says.
He cites former Reserve Bank of India governor D Subbarao who had written this in his 2016 book "Who Moved My Interest Rate," perhaps foreshadowing this controversy and we quote, "The poor quality of data is compounded by frequent and significant revisions, especially in data relating to output [GDP] and inflation which are at the heart of monetary policy." Unquote. Vivek also recalls former RBI governor YV Reddy's quip, "Everywhere around the world, the future is uncertain; in India, even the past is uncertain." Unquote.
Another view is that needless controversy could have been avoided if only the Central Statistical Office (CSO) had not organised a joint press conference with NITI Aayog representatives especially because the NITI Aayog should have no role in calculating the GDP numbers, as it is the job of CSO.
Former chief statistician Pronab Sen told PTI and we quote, "The integrity of CSO has been dented in the eyes of users. We have always had a system that data CSO brings out is completely removed from the political interference. Even the Prime Minister would get to know of the numbers just before they are released. Now to do that alongside NITI Aayog, which is a political institution like the (previous) Planning Commission was, is essentially diluting the integrity of the CSO." Unquote.
And as Times of India cited Sen, "When a political institution releases national statistical data, it puts a huge question mark on the credibility of the data and the political independence of the statistical agencies."
The new calibration was done, says TOI after disregarding an August discussion paper by the National Statistical Commission -- the autonomous body that helps in collection of data by India's statistical agencies -- calculating the back series that put the growth in the UPA years using the new base year at much higher than previous figures had shown, breaching even the 10 percent mark in two years. This was hurriedly rejected by the government as being inaccurate.But finally the proof of the pudding is in the eating and we will know soon enough if the voters can be swayed one way or the other by mere statistics or if they will vote for or against the ground reality.