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Interviews | Pronab Sen, former Chief Statistician of India, interviewed by TCA Sharad Raghavan
Pronab Sen, former Chief Statistician of India, interviewed by TCA Sharad Raghavan

Pronab Sen, former Chief Statistician of India, interviewed by TCA Sharad Raghavan

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published Published on Aug 29, 2018   modified Modified on Aug 29, 2018
-The Hindu

The former Chief Statistician on calculating GDP back series, on indicators of development, and the fall of the rupee

The draft of the back series GDP data, which was made public by the government recently, is unlikely to change drastically even if other methods of calculation are used, says former Chief Statistician of India, Pronab Sen. The noted economist discusses GDP, employment and poverty data; the value of the rupee; and how the absence of a Chief Statistician will affect India when it takes new decisions. Excerpts:

* The government has said that the back series GDP data is a draft, and that other methodologies are under consideration. If other methods are used, would the numbers change drastically?

No, very unlikely. The most common method is called the splicing method and what it does is very basic. You start with the latest estimates, which is 2011-12. You assume the growth rates in the previous years remain unchanged, and then you calculate what the levels of GDP would be in the previous years. What that does is it leaves the growth rates unchanged, it just changes the levels, and in a fairly predictable way. That is the simplest method. It is not done for GDP as a whole, but for each component of the GDP. After doing it for all goods and services, it is added up again.

What this method [the one made public] has done is that it has looked at those goods and services that existed in 2011-12 but did not exist in 1993-94 in the GDP tables. For just these goods, they have essentially done a back distribution. They have assumed 1993-94 to be zero, and 2011-12 to be what it is, and then simply put an exponential curve fitting between the two and then they have added these back in. They have not said what they did with the goods and services that existed in both time periods, but I suspect they used splicing for them.

Looking at the back series does matter, because when we talk about how the economy is doing and how we are doing in the future, these are all based on relationships that you have established in the past. All the policymaking bodies need these relationships. If you have only six-seven years of data, you can’t establish anything. You need to be able to go much further back. It is a very important exercise.

Normally what would happen is that MOSPI [the Ministry of Statistics and Programme Implementation] would have come out with the back series within three-four months of the main revision. The main revision was released in 2015-16, so it’s already been three years instead of three months.

* Overall, do you feel there is too much importance given to GDP numbers and not enough to other indicators?

The GDP number is important because it is an estimate of the total income being produced in the country in a given year. It defines, if you will, the size of the cake. But there is a whole bunch of other indicators. After all, the size of the cake is only one part of the story. How that cake is divided into different groups of people, sectors, that is equally important. When you talk about jobless growth, the growth part is coming from the GDP estimate and the joblessness part is coming from employment data. The GDP data are critical to know the pattern of growth you are seeing that is leading to the lack of jobs.

Employment is another big indicator. As a country, we have neglected employment data for far too long. It’s only in the last decade or so that we have started to say it is important, and finally got around to doing something about it only last year.

The second, which is simply not produced, is the damage we are doing to our natural assets. There is scattered data on forest cover, air pollution, water pollution, but you don’t have a measure of the state of our natural capital. Are you getting high income growth but at the cost of the environment? Is that trade-off worth it?

The third is to know how income is distributed. Poverty measures, for instance, are important. Because they tell you, is this increase in income benefiting the poor?

* We have various estimates of poverty right now.

Well, you have a very peculiar situation where the existing poverty estimates were brought into question by UPA II. The Rangarajan Committee was set up to go into it. They came out with a recommendation and that was rejected. What we have is the Tendulkar methodology, which was questioned by those who had commissioned the Tendulkar report, the UPA II. So we are in a bit of a limbo. The NDA has taken no position on it. It has remained studiously silent on poverty estimation. Nobody is questioning it because no data are coming out.

* The government has accepted that there is shortage of employment data. Do you feel the economy is capable of providing so many jobs?

The thing is, unless the data are there, you cannot even assess capability. In a world where technologies are changing rapidly, you have sectors which at one time used to be labour-intensive but are rapidly becoming not so intensive. Textiles, for example, in many countries.

When this happens, you need to have employment data to assess which sectors are generating employment and which are not. And then you have to assess whether we are growing fast enough in the sectors that are generating employment to be able to absorb the labour force. That’s how employment data tie in with GDP and sectoral growth.

* The rupee is hovering around 70 to a dollar. Is it moving towards a new normal?

The value of the rupee in the long run really depends on how your own inflation rate compares with the inflation rate of other countries. If it is high, what will happen is that the rupee will sooner or later have to depreciate because your currency is losing value faster than other currencies, and that’s what the exchange rate measures. It measures the relative value of currencies. In India, the high inflation period ended in 2013, but the rupee started depreciating after that, so there is a lag between the two.

* Several ratings agencies have said that the rupee depreciation will likely mean that the current account deficit (CAD) will start heading towards 3%.

They have got the cause and effect a little wrong. When the exchange rate depreciates, you should expect the CAD to improve. Because when the rupee depreciates, exports become more profitable and imports become more expensive. So there is a tendency to export more and import less. However, if you start by saying that the CAD is going to get worse, then the rupee will depreciate in the future. The cause-effect is not very clear.

The big issue is, why have our imports shot up? If you look at the trajectory of imports over the last three-four years, what you find is that the spike in imports coincides with demonetisation. What happened with demonetisation was that unorganised sector production got badly hit, and essentially created a vacuum. People wanted to buy the stuff, but producers couldn’t supply it because they didn’t have the money to produce. The net result was that a lot of these products were imported from China. That was one of the reasons why imports were shooting up. This is the non-corporate sector. Shortly after that, you had GST [goods and services tax]. GST didn’t affect imports very much, but it hit exports. So you have two effects happening simultaneously — demonetisation leading to higher imports, and GST hitting exports because the GST refunds were not happening.

So, what you are seeing in the CAD is the combined effect of demonetisation and GST. Over time, these are likely to correct themselves. So, first it will show up in the CAD and then in the rupee.

But we have a third problem facing us: the trade war between the U.S. and China. You have a situation where the U.S. and China are imposing tariffs on each other. What will end up happening is that both will start looking for alternative markets for their products, and India is the other large market. The danger is that both will start dumping in India.

* Is the solution for us to also impose duties?

We have already done that. We have had two rounds of increases in duties, but you need to be careful in doing that. The increase in duties as a device to buy yourself time in an unstable trade environment is one thing, but if these duties persist for too long, they become protective duties and lead to inefficiencies. So, these should be seen as temporary measures to meet a temporary situation. Once the situation goes away, we should seriously look at reversing these duties.

* There are some indicators of private sector investment picking up again. Is that a sign that the economy is getting back on track?

Yes, and no. Corporate investments picked up three-four years ago. We haven’t been noticing it. But what has gone down quite significantly is investment by the non-corporate sector. The business newspapers focus on the corporate, but the real decline is in the non-corporate sector. That is something that is not reversing itself. In fact, year on year, the share of non-corporate investments in total investments has been coming down quite sharply. It’s the lingering effect of demonetisation and GST.

* Looking at the fiscal deficit, the government is saying it will meet its target, but GST revenue is still about ?10,000 crore a month less than it should be. It is an election year. Do you think the government will meet the target?

It’s too late. The election year effect should have already found its way in the Budget. If it’s not in the Budget, you can't spend it. The Budget is now history, you know what’s in it. The real question is, will you spend more of the Budget before the election than you did earlier, and the answer is probably no. At the end of the day, your capacity to spend depends on the capacity of various government agencies to spend the money. I have no sense that that has gone up.

When people talk about the election year effect, I think they make too much of a big deal on the fiscal side. The real effect is that political parties start spending money that they have stashed away, and that usually provides a massive boost to the economy. Usually what happens is that your growth tends to go up in election years.

* We still do not have a Chief Statistician of India. Is this in any way hampering the performance of the MOPSI?

The absence of the Chief Statistician will not have a substantial effect on those activities of the Ministry which have been established. The data sets that have been brought out regularly will continue to do so. They are more or less on autopilot. The problems are going to come up when you try to do new things, such as this exercise of compiling employment data.
 
The Hindu, 29 August, 2018, please click here to access
 
Image Courtesy: The Hindu

The Hindu, 29 August, 2018, https://www.thehindu.com/opinion/interview/we-have-neglected-employment-data-for-far-too-long/article24803258.ece?homepage=true


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