(Excerpted with permission from Penguin Random House. ‘Demonetization and the Black Economy’ by Arun Kumar is available on Amazon.)
The government’s argument that demonetisation has had no impact on the economy because growth has been robust, belies its own earlier exhortations to the public to bear the pain for long-term gains.
As discussed above, there was pain for major sectors of the economy, primarily in the unorganised sectors. The government is quoting the quarterly rates of growth to prove its point. There are problems with this. No data are available for the non-agriculture component of the unorganised sector on a quarterly basis.
The numbers for the various parts of this component are based on data which comes from benchmark surveys conducted once every few years. In the meanwhile, some indices from the organised sector are used to project the data for these sectors.
Measuring Quarterly Rate of Growth of Economy
How is GDP growth calculated? It is based on data from the various sectors and sub-sectors of the economy.
Data are needed from the sub-sectors, and because of the specificity of each of them a different method is used for calculating the growth rate for these sub-sectors. The methodology is changed from time to time as lacunae are found and fixed after consultation, and this practice is usually not questioned by analysts.
However, the actual data are not usually available immediately so that some indicative data are used. Thus, immediately, only ‘estimates’ of growth can be made. These are revised from time to time and therefore, they are called provisional, advance and revised estimates. One must ask whether the methodology devised for normal times can be applied when the economy has experienced a big shock.
Surveys by manufacturers, business associations and other entities in December 2016 and January 2017 show that after 8 November 2016, employment, production and investment were hit hard in a whole range of sectors. Was this taken into account in the estimation of GDP growth?
New Benchmark Indicators Needed
The government document,15 ‘Methodology For Estimating Quarterly GDP’, says, “The production approach used for compiling the QGVA [Quarterly Gross Value Added] estimates is broadly on the benchmark-indicator method.” The document adds, “A key indicator or a set of key indicators for which data in volume or quantity terms is available on quarterly basis are used to extrapolate the value of output/value added estimates of the previous year.”
It also says, “In general terms, quarterly estimates of Gross Value Added [GVA] are extrapolations of annual series of GVA.” All these statements point to the use of the ‘benchmark-indicator’ and extrapolation of the ‘value of output/value added estimates of the previous year.’
What the quotation from the government document means is that for the unorganised sectors for which data are not immediately available, some indicators are used, for instance, the ratio of production in organised industry to that in the unorganised sector, along with how much employment is being generated. But when the economy is severely impacted, can the same benchmark indicators be used as in earlier years?
Indeed not, because the ratio of the organised to unorganised sectors changed on 9 November 2016. So, how can the projection from pre-8 November 2016 be valid for the period immediately after? Projection from the previous year (2015-16) would be even less valid.
Loopholes in Methodology
As already argued, the impact of shortage of cash was different for the organised and unorganised sectors, and therefore, the impact on their output was also different. That is why the ratio changed.
The government’s press note giving the growth figures for GVA says, “GVA from quasi corporate and unorganised segment has been estimated using IIP [Index of Industrial Production] of manufacturing.” But, as argued above, the IIP reflects the growth of the organised sector.
So, in the changed circumstances after 9 November 2016, it cannot be used to estimate the unorganised-sector production. The incorrect assumption is that a sub-sector that is declining is taken to be growing at the same rate as the organised sector.
The government’s press note adds, “IIP from manufacturing sector registered a growth rate of (-) 0.5 percent during April-December 2016-17.” But data show that the manufacturing sector grew at 7.7 percent. Is this an overstatement of the organised sector growth? If so, it is doubly wrong to use it to estimate the unorganised-sector growth.
It is due to this series of mistakes in the methodology that the official data showed a 7 percent rate of growth. Should a note of caution not have been inserted? The head of the government’s statistical department had argued that at present the impact of demonetisation on the economy cannot be estimated.
A lot more data are needed. If that is so, the official estimates are premature. As such, instead of relying on official data, one should go by the reports of what is happening on the ground.
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