Demonetization & GDP Politics should lead to statistical reforms
MARCH 15, 2017
By Naresh Minocha, Consulting Editor
"IS the primary aim of a statistical service to provide the data, the Government (that is, the current political leadership) requires or is its mission broader? The question is a real one ," says a United Nations Working Paper (WP) released way back in 1994.
Significance of this seminal work titled ‘Politics and Statistics: Independence, Dependence or Interaction?' to Demonetization-hit India would become real to anyone who reads it with an open mind.
WP contends: "a statistical service must find ways of being responsive to new or altered needs for data. At times such needs are explicitly articulated. At other times they must be inferred from current or anticipated political debates."
This should ring in as wake-up call for Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation (MOSPI) that blissfully shunned the word ‘demonetization' in its 15-page Press Note dated 28th February 2017.
The same call should have stirred conscience of Ministry of Labour & Employment's Labour Bureau which has not assessed the impact of demonetization on labour market.
The failure of these two premier statistical organizations to collect data on demonetization's impact is contrary to United Nations' Fundamental Principles of Statistics that every NSO/statistical service is supposed to follow as its dharma. We discuss the significance of these principles in Indian situation later in this column.
CSO Note on ‘Second Advance Estimates of National Income, 2016-17 and Quarterly Estimates of Gross Domestic product (GDP) for third quarter (Oct-Dec) 2016-17' has assessed Q3 GDP growth at 7.0 percent. It also computed GDP growth for entire fiscal 2016-17 at 7.1 (second advance estimate) over previous year.
This estimate is most optimistic one made by an entity, even better than guarded projections made by Finance Ministry's Economic Survey (ES) for 2016-17.
Presented on 31 st January 2017, ES has devoted one full chapter to demonetization, which it dubbed as "radical domestic policy action ."The Survey stated:" It would be reasonable to conclude that real GDP and economic activity has been affected adversely, but temporarily, by demonetization".
CSO's demonetization oversight naturally emboldened Prime Minister Narendra Modi to cash in on CSO's GDP data a day after its release. At a political rally in Uttar Pradesh, Mr. Modi obliquely lashed out at Nobel laureate Professor Amartya Sen who currently teaches at Harvard University.
Instead of naming Prof. Sen who had criticized demonetization as "despotic action", Mr. Modi preferred to run down Harvard, the oldest education institution in the US that has produced 48 Nobel Laureates and 32 heads of state!
Mr. Modi thundered: "Harvard se zyada dum hota hai hard work mein" (Hard work is more effective than Harvard.) He added "GDP data, released yesterday, prove that the note ban didn't have any adverse effect on our economy."
Mr. Modi has every right to shout daily from house top about the hard work being done by a tea seller/son of a poor woman. He shouldn't, however, ridicule Harvard just to score brownie points over Prof. Sen. Fact is that Harvard is a product of hard work of millions of its stakeholders done over the centuries.
Mr. Modi should also have kept in mind the fact CSO has avoided mentioning demonetization, leave aside making any special effort to collect data on its impact. Moreover, he should recollect the fact CSO has had its own quota of GDP errors over the years.
Two instances deserve recall. First, President Pranab Mukherjee, when he held Finance Portfolio in May 2012, issued a statement on GDP reduction. He stated: "The GDP growth at constant prices for 2011-12 has been revised downwards to 6.5 per cent as against the Advance Estimate of 6.9 per cent released in February 2012."
The second instance is admission of a big error in GDP for 2015-16. Answering a question on this issue in LokSabha on 7th December 2016, the Minister for Statistics and Programme Implementation , D. V.SadanandaGowda stated: "Discrepancies arising in the estimation of GDP at constant market prices were Rs. 2,14,843 crore in 2015-16, which accounted for 1.9 per cent of GDP at constant prices".
There is thus ample scope for CSO scaling down its GDP numbers in the 2nd, 3rd or 4th revisions as is its practice.
And a hint in that direction was given by Chief Statistician T C A Anant. In a news story carried by Indian Express, Mr. Anant observed: "quarterly data indicators used currently for GDP estimation are ‘limited' in nature". He stated: "More complete information for the third quarter of the current fiscal, the period when the demonetization exercise was rolled out, should be available by next year."
Mr. Anant's statement is hard to digest as plenty of information on impact of demonetization on different sectors was available on virtually on daily basis. Leave aside thousand of news reports of factories shutdown, production cutbacks and job losses that Government belittled by dubbing them as anecdotal evidence,
CSO could have relied on hundreds of transcript of conference call of companies on impact of demonetization. It could have factored in high frequency economic indicators such as foreign tourist arrivals, passenger vehicle sales and two-wheeler sales.
PM should have also kept in view a flood of criticism from experts over GDP numbers dished out by CSO under a new methodology adopted in January 2015. Morgan Stanley's Chief Global Strategist Ruchir Sharma has time and again stated that Indian GDP is over-estimated.
One of the most comprehensive and authoritative critiques of Indian GDP computation is a paper from two reputed economists: R Nagaraj, Indira Gandhi Institute of Development Research & Prof. T N Srinivasan,Yale University.
Presented at Indian Policy Forum in July 2016, Paper is captioned ‘Measuring India's GDP Growth: Unpacking the Analytics & Data Issues behind a Controversy that Refuses to Go Away'.
As put by the Paper, "Besides the on-going debate, there are many longstanding methodological issues that beset Indian NAS, which (strictly speaking) do not follow the global templates; there are some long pending issues which were not addressed in the recent revision. We believe many of these issues are still valid, and they warrant flagging in any methodological review of the NAS ."
Against this backdrop of criticism, National Statistical Commission (NSC) constituted a 26-member committee on real sector statistics during October 2016.
According to a reply to a Parliament question, the committee would, among other issues, study requirement of statistics for GDP estimation, data governance for quality, timeliness and credibility.
Demonetization or no demonetization, Indian GDP numbers, which ever the political regime in power, should be taken with pinch of salt. And what applies to GDP numbers applies to all other national statistics as timeliness, reliability and quality of data have been a cause for concern for all dispassionate stakeholders.
We can't here miss out observations contained in International Monetary Fund (IMF's) staff report on India that was released on 22 February 2017.
The Report says: "a sales-tax-based extrapolation of trade turnover value from the base year does not provide an accurate gauge of growth of economy-wide value added from trade. Constant price estimates of GDP deviate from the conceptual requirements of the national accounts, in part because the Wholesale Price Index (WPI) is used to derive volume estimates for many economic activities. The WPI is not the price counterpart for GDP by type of activity because the WPI includes some product taxes whereas GDP by activity does not include product taxes. Therefore, the WPI can be influenced by changes in tax rates. Further, the WPI weights include imports but the prices for the index are collected only on domestic goods ."
It continues: "Large revisions to historical series, the relatively short time span of the revised series, and major discrepancies between GDP by activity and GDP by expenditure complicate analysis. The current index of industrial production (base year 2004/05) has limited usefulness for compiling national accounts statistics as its weights are over ten years old and thus its use may lead to some bias in estimates ."
As for labour statistics, the Report notes: "There are long-standing deficiencies in employment data: they only cover the formal sector, which accounts for a small segment of the labour market, and are available only with a substantial lag ."
Leave aside statistical deficiencies, Labour Bureau did not even care to undertake snap survey of ‘labourchowks', the locations in cities where daily wage earners assemble for hiring/contract work. This survey would have helped PM know the percentage of daily wage earners who didn't get any work for several days together. It would have also helped know what percentage of labourers went back to villages due to demonetization-inflicted joblessness.
Answering a question on impact of demonetization on job market, Minister for Labour & Employment Bandaru Dattatreya told Lok Sabha on 6th February 2017 that the Union Government does not maintain data on total number of daily wage labourers employed in the country. It has not conducted any study to assess the impact of demonetization on labour market.
This brings us back to the real question raised at the beginning of this column. When will these premier statistical entities show professional initiatives? Should they only act at the prompting of their political masters?
To answer these issues, one has to refer to United Nations' Fundamental Principles of Statistics (FPS). Consider 1st principle to assess failure of LB & CSO to fritter away rare opportunity to study the impact of unprecedented demonetization of its type in the world.
First Principle reads as: "Official statistics provide an indispensable element in the information system of a democratic society, serving the Government, the economy and the public with data about the economic, demographic, social and environmental situation. To this end, official statistics that meet the test of practical utility are to be compiled and made available on an impartial basis by official statistical agencies to honour citizens' entitlement to public information".
The second principle is equally relevant to the conduct of Indian statistical entities during the dark period of demonetization. It says: "To retain trust in official statistics, the statistical agencies need to decide according to strictly professional considerations, including scientific principles and professional ethics, on the methods and procedures for the collection, processing, storage and presentation of statistical data."
To be fair to statistical entities, we must note that they are subject to political pressure under different regimes for want of constitutional protection/autonomy, which is available to Comptroller and Auditor General (CAG).
It is here pertinent to recall what happened in 2013 under UPA regime. A day after CSO released Advance Estimates of 5 Percent growth in GDP in 2012-13, Finance Ministry felt that this was an underestimate.
In a release dated 8th February 2013, the Ministry stated: "CSO bases its advance estimates on the data till November or December, depending on availability. The Ministry further states that this makes its estimates accurate when GDP growth is following a trend, but not when it is turning. So, for example, growth was overestimated as the economy slowed in 2008-09 and 2011-12, while it is probably underestimated now".
This was followed by public ridicule of GDP estimate by Planning Commission Deputy Chairperson Montek Singh Ahluwalia and Finance Minister P. Chidambaram.
Such subtle or overt political interference or the fear of criticism-allergic political authority can demoralize statistical organizations and ultimately transform them into spineless wonder. This must not be allowed to happen.
The Government should thus consider enacting a law to grant constitutional autonomy to CSO, Labour Bureau and all other statistical agencies.