So does the argument of the former Chief Economic Advisor hold ground?
In some sense, one would hope that having been in a position like that, what he says should be well considered and needs to be looked at seriously. Having said that, issues have been raised about the new series of national accounts ever since it was introduced. I have looked at his papers, I have not really fully examined the exact methodology that he has employed and also, I do not have a good method of really coming or judging his estimates of 2.5% of GDP overstatement on a cumulative or on a compound growth rate basis but that is actually a huge.
But if you reduce the growth rate by 2.5% since 2011-2012 or thereabouts, cumulatively there comes to something like 20% or thereabouts in terms of the current estimate of GDP in absolute terms. So it is a very serious issue. As I said, I do not have the methodology or the time yet in a sense to evaluate that particular number.
Having said that, I have also been raising similar issues. He has particularly talked about manufacturing and I am in fact in the process of writing a paper which we will be presented in a seminar in Brookings on June 28th where I have raised this issue, saying it is difficult to understand some parts of what has been happening in the Indian economy because of inconsistencies and indicators.
You are saying there are inconsistencies with respect to indicators, but MOSPI is saying that whatever we are doing here in India with respect to the methodology is in line with the global practices. It has been approved by IMF. So, between problems with the manufacturing side of data and the methodology that the former CEA has used, where do the problems lie and what is the best way to deal with it?
As I have already said, I have not examined the exact methodology and what one can do is evaluate it on a numerical basis. What I am saying is that if you look at manufacturing growth, there are two-three indicators that are inconsistent with the value-added growth calculated in the GDP of National Account Statistics.
If you look for example at manufacturing goods exports, these have been staggered in absolute dollar terms for six to seven years. That is number one.
Number two, the indicators for capital goods production in the manufacturing sector show zero growth for the same period. If you look at capital goods imports, those are firm numbers. But those are also zero growth or slightly negative actually in the last six to seven years. Further, other indicators like the index of industrial production, the annual survey of industries for the last six-seven years, provided annual growth rate of under 4%.
Whereas there is a new methodology, there is a new data source through the ministry of corporate affairs data, I do not have the privilege of knowing what exactly they are doing with the data and what the data consists of . So, I cannot contest the methodology they are using but there are inconsistencies that stare you in the face.
Similarly, if you consider credit growth to industry, that has been very low for the last six-seven years. The point I am making is that there are objective indicators which are difficult to argue with and which are inconsistent with the manufacturing growth indicators in the national accounts. My view on this is, given that these inconsistencies exist, it is very important for the National Accounts Statistics or the CSO for the government to provide enough information to explain the discrepancies.
What is the problem here? Should we perhaps have an independent panel looking into it?
The CSO is supposed to be independent. It always has been and the point that Arvind Subramanian has made is that these inconsistencies did not exist in earlier periods. He is right there. Similarly, the indicators that I have given, those inconsistencies did not exist in the earlier period. There has always been issues with the quality of the IIP. There are some issues to do with the quality of ASI (Annual Survey of Industries), but there are no issues with the quality of import data or the export data.
The simple point I am making is that given that these issues have been raised ever since the series was introduced, now he is making a further point that for the credibility of India as a whole and for Indian statistics national accounts, which have always been held with high repute domestically and internationally that it is very important for the government, for the CSO, for the statistics authorities to come out with explaining look how can we reconcile the inconsistency between different indicators and the national account statistics.
Would you also say there is a need for an independent committee to look into the methodology?
As I said, it is important for them to explain the discrepancy. How they do it -- whether it is through a government committee, a departmental probe, an independent committee -- is for them to decide but something that ought to provide enough data, enough analytical explanations for there to be adequate debate by professional statisticians and economists.
Since you are saying that there have been inconsistencies with respect to the manufacturing side data, would you also say that perhaps this led to a faulty policy approach from the government as well as bureaucrats’end?
I would not say a faulty approach but I would say that to be able to design policies to achieve the objective that you want, obviously you are handicapped if the data is not good. On the other hand, if the data are indeed good, then you have been in good shape.
How damning is it for a country like India to be dealing with the entire issue on data credibility on GDP credibility?
I would not say damning but I would say once again that we had a very high reputation on the overall quality of our data for a long period of time and it saddens me as someone who has worked in the government in technocratic positions in different places. I used to be part of the ministry of Economic Advisor. I used to compile the IIP data and I knew many of the problems that existed in that data but the point is that sunshine is the best policy in data. When there are issues with data, you need to make it as transparent as possible so that it can be evaluated without partisan positions.
It also saddens me to see that some of the debate on this issue has now been politicised when data should not be politicised. Interpretation of data yes, there will always be different policy views, different orientations of different analysts, but not on that data itself.
Let me also shift focus to the growth figures. Everybody is talking about a slowdown in the economy, the kind of numbers that we are seeing on auto sales as well as FMCG, are pointing to a large slowdown, that we had not really anticipated. What is the way out of this?
First, the government must be able to actually recognise the issue that you cannot cure an ailment until you first observe that you have an ailment. Second, that you have diagnosed it and third, find the treatment, given the diagnosis. It will be very important for the new government to come to grips with what has happened and what is happening.
I must say the two cabinet panels that the Prime Minister has announced on investment and employment is exactly the way to go forward. But under those cabinet committees, they must start intensive technocratic analysis of what has happened to recognise what the issues are and then start devising ways.
Are we headed for a large period of slowdown or a sub 7% growth?
I do not know because first of all talking about GDP statistics we need to have a cleaner understanding of what those GDP growth numbers really are and if there has been indeed a problem? However, I would make an additional general point that I have observed that during the last few years, there has been an inadequate attention to the issues of growth.
One of the characteristics of the Government of India since independence has been a high focus on growth. All through the period, we always had five-year plans. Each of them had a growth target and you could then evaluate yourself against those longer term targets and which of course are annual targets as well. One of the interesting things about analysing the growth data since independence is that interestingly enough, the five year plan targets was 90% met actually.
The five year plans…
Well I would say we should bring back the five year plans. We may want to name it differently and you notice the Prime Minister has already asked every ministry to come up with a five-year plan, five-year roadmap. But I do not see an overall an attempt to explain how these things are going to be put together. I do believe that no country can achieve high growth on a consistent basis. By high growth I mean 7% plus. We need really to move to 8% to 9%. You cannot achieve it without the highest focus on growth.
Whatever has happened over the last few years is there has been much more focus on how to distribute more efficiently, particularly through cash benefits, direct benefit transfers etc. I have nothing against either cash transfers or direct benefits transfers etc, but I believe that it ought to be a part of a broader strategy focusing on growth within growth and the kind of policy one should have for social welfare, direct benefits etc.
In the last few years, both policy makers as well as economists have been concentrating too much on the issue of transfers and too little on the issue of growth.
When you are saying you should focus on growth, would you say focus on certain sectors, on manufacturing to provide incentives, to help MSMEs? What would you want to see because the government is in the midst of a budget making exercise. Which are the issues that need to be addressed?
Lots of fruits are low hanging or high hanging as of now.
Which sectors would you say then?
I want to pick only sector. I believe there has to be a huge focus on manufacturing and industry overall and particularly on labour. One of the key problems that exists and we have seen with reference to the unemployment numbers, that we have only 14 million people employed in organised sector manufacturing. In China, it is over 100 million. So it is not the case that they are 30 we are 14. They are 100 and we are 14, with similar magnitudes of population.
Whenever we talk of manufacturing, you hear both the government as well as the private sector, private industry talking about artificial intelligence, high level industry etc. You almost never hear about setting up manufacturing which employs lots of people and for consumer goods clothing, textiles, shoes, furniture everything that you and I have in our homes.
We have, in fact, lost our advantage to our neighbouring nations.
Absolutely. Somehow I do not find private sector being interested in this. No country has grown at 7% plus on a sustained basis without high manufacturing growth -- double digit growth - and particularly no country whether it is China, Korea, Japan in its earliest stages, the southeast Asian and other countries etc. has grown without high growth in manufactured products which are labour intensive. Our per capita income is about a third or a fourth of China’s. We have the labour cost advantage. It has to be utilised and then must you focus that.
Would you also say that this is a long-term strategy. In the short term, everybody has been talking about the liquidity concerns owing to the NBFC crisis. The NBFCs are demanding a special liquidity window. Do you think a liquidity window is going to solve the current issues of the NBFC sector?
There are two kinds of comments on that. One is that as far as liquidity issues are concerned, you had to distinguish between liquidity problems and insolvency. The central bank in any country cannot solve insolvency problems and should not. The central bank in principle can address liquidity problems. I do not have enough knowledge to know whether the NBFC problems are to do with insolvency or illiquidity.
In terms of the answer to your question, it can only be given once if one knows where the insolvency problems, where the illiquidity problems. Sometimes it does happen that something that starts as an illiquidity problem becomes insolvency problem if it is not addressed. I think that is where we should look at.
However, there is one other very broad general issue which is pervading the whole financial sector and that is puzzling me that from the early 1990s till the late say around 2010 or thereabouts, household sector financial savings had been in the region of around 10% of GDP. Since around 2011-2012, we saw the tide turn and from 2011-2012, they have come down around 7% of GDP.
It is a huge fall. It is similar to the early 80s and if you coupled that with the fact that total government borrowing that the centre plus the states is around 7% of GDP, it is not surprising that there is a problem of liquidity because it is not high enough financial savings in the country and one recent indicator of this general problem is the artificial insemination of liquidity the Reserve Bank has done in the last couple of months in borrowing $10 billion through forex swaps from the banks to inject domestic liquidity.
There is two of them…
Yes, a combined amount of about $10 billion which is about Rs 70,000 crore.The Reserve Bank felt it necessary that there is not enough liquidity and then they could not inject this liquidity through open market operations (OMOs). Does that mean that there is not enough financial resources in the country? What do you do, you go out and get the banks to raise dollar resources and then swap them. You then set up a liability for the Reserve Bank for the future but temporarily you inject that here.
I am just mentioning this as an indicator of a broader financial savings problem. This is one of the other issues. The government plus RBI should really set up a committee or analytical group to understand what has happened. I do not. I had some understanding between 2011 and 2013 when inflation rates have gone up to around 10% and so, many real interest rates have become negative. A lot of people had switched to gold from financial savings but that is not the case now when the interest rates are really positive.
Since you are also a member of the Economic Capital framework, we are given to understand that there are differences of opinion within the panel. Is that the reason that there is going to be another meeting that the ECF panel? Does that mean the recommendations would be favouring the government a lot more?
One thing I can tell you is that almost all the work is done. Some final finishing touches have to be given to the report. This is always the case when you have a committee report, particularly technical in nature.The final report has to be completely clean. We had a meeting yesterday and the report is almost ready.
Can we expect it by the end of the month?
Yes, I would think so.
Can you give us a hint on which way the panel is headed?
As I said, because the committee has not finished its work. I am not able to comment on that.
I hope you talk to us after the report is submitted.
Yes, once the report is submitted and I am permitted by the Chairman and the Reserve Bank, I will be very happy to..,
Would you at least say that yes the RBI has enough reserves?
I wouldn’t like to comment on this issue at all until the committee’s work is finished.