The Government’s unbelievable “growth” story

Statistics and figures being cited by the government on the state of economy have seemed far removed from reality for quite some time, even under the UPA government. True to form, the Narendra Modi government seems to have taken this to new heights.

“Lies, damned lies and statistics”, a statement attributed to former British Prime Minister Benjamin Disraeli by Mark Twain, comes to mind on reading reports of a 5.7% spurt in industrial output in November 2016, after demonetisation was announced on November 8. This was touted as evidence, if not proof, of demonetisation having had no negative impact. In fact, the government claimed, demonetisation has helped the economy.

They glossed over the fact that this ‘rise’ was registered against a negative growth, or decline, of -1.8% in the previous month, and -3.4% November 2015. Under the circumstances, just stopping further decline would throw up a positive figure. Besides, the figure was for entire November, not for just the 20-odd days after demonetisation announced on the night of November 8.

The report on Industrial Production (IIP) for November 2016 released by the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation is compiled using data received from 15 source agencies: Department of Industrial Policy & Promotion; Indian Bureau of Mines; Central Electricity Authority; Joint Plant Committee, Ministry of Steel; Ministry of Petroleum & Natural Gas; Office of Textile Commissioner; Department of Chemicals & Petrochemicals; Directorate of Sugar & Vegetable Oils; Department of Fertilizers; Tea Board; Office of Jute Commissioner; Office of Coal Controller; Railway Board; Office of Salt Commissioner; and Coffee Board.

The CSO press release starts by saying that “the General Index for the month of November 2016 stands at 175.8, which is 5.7% higher as compared to the level in the month of November 2015”. It adds, “The cumulative growth for the period April-November 2016 over the corresponding period of the previous year stands at 0.4%.”

More importantly, it says, for the Mining, Manufacturing and Electricity sectors “the cumulative growth… during April-November 2016 over the corresponding period of 2015 has been 0.3%, (-) 0.3% and 5% respectively.” That is, manufacturing shows a decline of 0.3%. This only adds to the decline of -.3.8% in November 2015. This point in the press release remained unreported.

That aside, it is curious that the figures for December 2016 show a trend quite the opposite of what was highlighted in the CSO report. Central excise in December 2016 dropped to nearly half of what it was in Dec 2015, as did service tax. (See graph accompanying the report “Cash Crisis may Not Have Hobbled Economy”. The story doesn’t mention it.) Central excise is levied on goods manufactured, and service tax is levied on every service. Such a decline in these two indicates a sharp decline in manufacturing and economic activity.

GOVERNMENT CLAIMS FLY IN THE FACE OF SEVERAL OTHER ESTIMATES

Contrary to government claims, noted American economist Steve H Hanke tweeted on Friday (January 13) “Modi's cash crunch is sure to slow the growth of the Indian economy.”

This was corroborated by Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI)—an indicator of manufacturing activity—which said that the manufacturing sector contracted in December as new work orders and output took a knock for the first time in 2016. It fell to 49.6, down from 52.3 in November, said the report.

According to economic outlook report of Centre for Monitoring Indian Economy (CMIE), released on Friday 12, things are worse. While downgrading its pre-demonetisation projection of over 8% GDP growth to 6%, it estimated “the long-term damage to be greater” than the damage caused to growth during the current financial year. It now expects this growth trajectory to remain around 6% per annum for the next five years (up to 2020-21).

That contradicts the claims of spurt in economic activity and crediting demonetisation for it, even though there is no reason or explanation as to why and how would demonetisation cause this increase. On the contrary, there has been a manifold increase in demand for MNREGA work along with reports of huge layoffs of labour and shutting down of factories and businesses in the wake of demonetisation.

Post-demonetisation, RBI itself lowered the GDP forecast by half a per cent to 7.1, Asian Development Bank and World Bank too lowered it to 7%. In fact, even the reality of growth rate – or state of economy – portrayed by GDP figures has been disputed ever since this government changed the method of computing it. The numbers seem completely in conflict with other economic indicators. As Jahangir Aziz wrote last year, there is little corroborating evidence from other data sources that the growth rate is anywhere near the official statistics. Before the shift to the new methodology, there was an accepted narrative based on the old series that tells a story of India where growth averaged 8% over FY 2006-13 before plunging to 4.7% in FY 2014, when persistent high inflation and current account deficit driven by loose monetary and fiscal policies pushed India to the brink of a crisis.

Then, Modi government switched to a new method of computing it, invoking it from the last year of UPA. This pushed up growth rates of 2012-13 and 2013-14 by two percentage points, from 4.5% to 5.6% and 4.7% to 6.6% respectively. Instead of production figures, this was based on “value added”. Subsequently, growth continued to rise to reach 7.6% in FY 2016, hitting nearly 8% in the quarter that ended March 2016. The computation according to the older method, needed for a proper comparison and understanding, was not given by government. According to former finance minister Yashwant Sinha, the ‘discrepancy’ due to new method, which was below ₹30,000 crore in 2014-15 became ₹1,40,000 crore in 2015-16. If the ‘discrepancies’ are taken out, then the growth figure sinks to 3.9%. The new method, in fact, can show an increase in ‘value added’ even when production has actually declined, said Sinha.

DASHED EXPECTATIONS FROM DEMONETISATION

The government may well claim high growth, but it certainly does not feel like it. None of the other data show any resemblance to an economy surging at such a pace. Employment has not grown and, in the last month, it has actually shrunk. Investment is at its lowest in more than three decades. Bank NPAs have been rising steadily. Nothing has happened on the ground to boost economic activity and what was there has been severely hit by demonetisation.

None of the objectives of demonetisation have been achieved – wiping out black money, wiping out counterfeit currency, wiping out terror finance and ending terrorism, ensuring tax compliance and ushering in cashless economy. If these have seen some set back, it is small and, in any case, not going to last long.

The government’s expectations of a windfall of ₹3-4 lakh crore due that amount of demonetised currency not coming into banks was belied. Now it says that much of the cash deposited in banks is black money and the government will track it to its sources. That means lakhs if not crores of bank account holders who will face income tax notices. Given the way the system works, there is every likelihood of misuse of power and harassment of citizens due to the new inspector raj.