THE GIST of Editorial for UPSC Exams : 13 December 2018 (A self-goal for India)

A self-goal for India

Mains Paper 2: Economy
Prelims level: GDP growth
Mains level: Economic Growth and development

Context

•  The integrity of the Central Statistics Office (CSO), most knowledgeable people are asking: if most important indicators of the Indian economy were better in 2004-2014, how is the GDP growth rate higher in estimates just released (7.4% per annum since 2014 and only 6.7% per annum in 2005-2014)?
•  This is curious also because the Mundle expert panel, which was constituted to prepare the back series under the revised methodology, had not come up with the counter-intuitive estimates that have just been released.
•  They estimated the average GDP growth at market prices at 8.37% (2004-05 to 2008-09), and then 7.69% (2009-10 to 2013-014).

Three structural changes

•  Three changes occurred in the revision that was first announced in 2015:
•  First, in the base year;
•  Second, in the methodology from GDP at factor cost to GDP at market price (this is the international norm and the basis of the current government’s claim that this is what CSO has followed);
•  Third, in the method of estimating company output/revenue, which has been done in a much more detailed manner using new data collected by the Ministry of Corporate Affairs (MCA 21).

Questions over the new series

•  MCA 21 is available since 2008 but is probably not available prior to that. This could be one source of the problem.
•  Another possible source may be that the CSO used a deflator which is different for the back series.
•  The questions arise over the new GDP series for the following substantive reasons.
•  Agricultural growth rates at constant prices were much higher from 2004-05 to 2013-14 than since then.
•  Two back-to-back drought years (2014 and 2015) notwithstanding, policies have not been exactly supportive. Why else are farmers agitating year after year?
•  The Index of Agricultural Production, with a base of 100 for the triennium ending 2007-08, had risen to 129.8 in 2013-14. But after falling, it barely recovered to 130 in 2017-18.
•  Agriculture, like the non-agricultural informal sector, collapsed first after demonetisation and then after a poorly implemented Goods and Services Tax.
•  Both measures affected output as well as jobs, especially in the unorganised sector which constitutes nearly half of GDP and half of all exports.
•  Exports have performed much worse in the last four years than over the preceding 10 years.
•  Exports were only $50 billion in 2002-03, but had risen to $250 billion in 2010-11, and reached $315 billion in 2013-14.
•  They have not recovered to that level even in 2017-18.

Measuring GDP growth

•  Investment to GDP is the most egregious source of difference in economic performance between the two periods.
•  In 2003-04, India’s savings rate had risen from 9.5% of GDP in 1950-51, and stood at 25.9%.
•  It rose sharply thereafter to peak at 36.8% precisely because of a rise in per capita income growth to a level unprecedented in India’s economic history, and not achieved since.
•  This rising savings rate contributed to an unprecedented increase in the investment to GDP ratio, which peaked at 36.8% in 2007-08, having risen from 23.8% of GDP in 2002-03.
•  Then the investment to GDP fell in the wake of the global economic crisis. But in 2010-11, it still stood at 34% of GDP. In the 2011-12 series.

The new policy taken by the government

•  The new government, having inherited an investment/GDP share of 31.3% in 2013-14, allowed it to fall to 30.4% in 2014-15, to 29.3% in 2015-16, to 27.1% next year (provisional estimate), and 26.4% in 2017-18.
•  It is investment that mainly drives growth.
•  The slowing growth is consistent with trends in the Index of Industrial Production (IIP, which consists of manufacturing, mining, electricity).
•  IIP had risen from 100 in 2004-05 to 172 in 2013-14 (in the 2004-05 series), and from a base of 100 in 2011-12 (in the later series) to 107 in 2013-14, but only rose to 125.3 in 2017-18.
•  In no year between 2004-05 and 2013-14 did bank credit grow less than 14% (range 14.1 to 37%).
•  Since then, in no year has bank credit grown faster than 10.9% (range 8.2% to 13.9%).
•  Plant load factor (PLF, or the ratio of actual energy produced to maximum possible energy that could have been produced) averaged 68.5% from 2004-05 to 2013-14, and until 2011 had never fallen below 74%.
•  The PLF from 2014-15 to 2017-18 has been 57%.

The situation in the labour force

•  The sharp fall in the entrants into the labour force after 2004-05 resulted from the very large increase in those joining and remaining in school.
•  At the same time more than 5 million workers from agriculture left farming for non-agricultural work.
•  This was the first time in India’s history that the absolute number of workers in agriculture fell. That tightened labour markets in rural areas and, apart from a rise in demand for labour from MGNREGA from 2005 to 2012, raised open market rural wages, which had a ratchet effect on urban wages.
•  As a result, monthly per capita consumption expenditure rose faster than hitherto, reducing poverty very sharply.
•  Never before 2004 had the absolute number of poor fallen.

Way forward

•  However, the rising wages (plus faster non-agricultural job growth) reduced the absolute number of the poor (according to the Tendulkar poverty line) by 168 million between 2004-05 and 2011-12, a staggering achievement for India.
•  More youth have become better educated since 2004, and yet non-agricultural jobs are not growing.
•  In both analysis until 2016 and the Centre for Monitoring Indian Economy data since then show beyond a shadow of doubt that job growth is lower in recent years than from 2004 to 2014.
•  The world has already begun to laugh at us. A commentator of the Carnegie Endowment for International Peace wrote: “I’m afraid this entire exercise casts doubt on the credibility of India’s growth numbers.
•  When even government officials present and former are left scratching their heads, you know there’s a problem.”

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) TINXSYS dataset used for calculating interstate trade values and trade balances is administered by:
(a) Goods and Services Tax Network (GSTN)
(b) Central Board of Excise and Custom (CBEC)
(c) Central Statistics Office (CSO)
(d) National Securities Depository Limited (NSDL)

Answer: A

Mains Questions:
Q.1) How is the GDP growth rate higher in estimates just released (7.4% per annum since 2014 and only 6.7% per annum in 2005-2014)?