The macroeconomic data released by the Centre last week was surprising, as growth in the fourth quarter (January-March 2020) seemed optimistic at 3.1 per cent. For the full year 2019-20, it stood at 4.2 per cent. As the country emerges from a long lockdown, Sindhu Bhattacharya spoke to India’s former Chief Statistician Pronab Sen.
Sen spoke on the credibility of government data in the recent years, the need for another fiscal stimulus which should be 3-5 times larger than the one given by the government and why the ratings downgrade by Moody’s should not be a cause for worry. He favoured a large cash transfer to those affected most by the COVID-19 lockdown and advocated that the RBI should print money to bail out the government in the current scenario. Excerpts:
The Federal: What are your thoughts on 3.1 per cent GDP growth number for Q4 of 2019-20 and frequent data revisions by the Central Statistics Office (CSO)? Also, what would the economic loss have been for just the last week of March, when India went into a sudden and complete lockdown?
Pronab Sen: My sense is that the 3.1 per cent growth number is a bit higher than it should be. This is because of the way data is collected and used. Data, like IIP data, for example, depends upon reporting. If units are closed, production is not happening, and units do not submit their data, such units would be dropped from the sample rather than treated as having zero production. This creates an upward bias in the estimate. The data for March is usually compiled and sent to the CSO sometime in April, so what would have happened is closed units were possibly dropped. Back-of-the-envelope calculations show us that since March 25, weekly loss to the economy was about ₹2 lakh crore. This essentially takes into account sectors which were shut down. Only about 40 per cent of the country was operational during the lockdown. This quantum of loss has never been seen before. Even in 2009, during the global financial crisis, the hit to our economy was only 3 per cent of GDP.
Federal: The growth figures for Q1, Q2 and Q3 have also been revised this time. Why would such frequent revisions have become necessary? Has it been the usual practice at the Statistics Ministry to revise GDP data multiple times a year?
Sen: The CSO puts out a revision calendar which tells us exactly when revisions to data are made each year. The revision policy should be strictly adhered to, otherwise, it creates confusion and doubt. The calendar says quarterly estimates for first three quarters are not changed until the provided estimates for the year are released. This happens in May, when provisional for the year and Q4 data are put out. This is the time when previous quarters’ data are also revised. The first time one estimates growth, there is only partial data available since a lot of units do not submit data on time. Hence, provisional estimates are made and then revised every time the annual estimate is changed. A lot of state government data comes late, municipal data too. The revision in February breached the revision calendar.
Federal: Had the data for all three previous quarters not been revised, what would have been the growth number for Q4? The ministry has said that further revision of this data is likely. Is such frequent revision unavoidable given the present pandemic uncertainty?
Sen: The Q4 growth number would be slightly lower, in my estimate, though would not like to give an exact number. I am presuming the February data for Q1, Q2, Q3 were not complete and the numbers presented now are the actuals. Therefore Q4 growth number would be only slightly lower. And, the full-year number would commensurately be lowered.
Federal: Is India’s data collection, data analysis—especially on the macroeconomic front—less robust now under the present government than earlier? Please give us your thoughts on what should be done to bring back credibility to such data.
Sen: Data that is produced in India is actually pretty good. The problem, of course, over the last two years has been a lot of data suppression. So, data, which could have been used, has been suppressed. If you suppress data, that will obviously affect estimates. The credibility of the statistical system has thus suffered in the last two years, principally because of suppression of various data sets, which the public has learnt about because of leaks.
Federal: What is your estimation of GDP degrowth in the current quarter and for fiscal 2020-21? How long would it take India to reverse this decline? And, what should the government do to put the economy back on track?
Sen: This year, we should certainly see negative (GDP) growth and in all probability, it will remain negative next year as well. The effect of the current circumstances will linger. All we are measuring now is the loss of production and incomes during the lockdown. This loss of income, sooner or later, will translate into a reduction in consumption, which will then lead to a further reduction in production. This will then lead to further loss of income and so on. This process will continue in a diminishing manner and could take about a year and a half to play out. As for what the government needs to do, I would say as soon as lockdown has been lifted and production can resume, the government needs to come up with a large fiscal stimulus. At the moment, about ₹2 lakh crore has been given. What we need is at least three to five times this number. Because that is the size of the damage we are talking about. In nine weeks of lockdown, the economy would have lost about ₹18 lakh crore. This is a huge number and this will multiply and become large and larger, as I explained earlier. Government needs to step in now and correct the damage upfront. The Centre never has a resource constraint because of its power to print money. Resource constraint does exist for state governments. Centre has announced an additional ₹4 lakh crore of borrowing and states have also been allowed an additional ₹4 lakh crore of borrowings. Assuming all of this money is mopped up from the market, no surplus liquidity will be left and the RBI may have to print money to finance the additional stimulus.
Federal: Doesn’t all this talk of printing more money raise the risk of India being further downgraded by global ratings agencies?
Sen: Why are we worried about ratings agencies? We should worry about them when the investment cycle picks up, which won’t happen for at least two years. The first thing ratings agencies look at is a country’s growth prospects. If by not printing money, we allow growth rates to fall, then these agencies are unlikely to give us improved ratings in any case.
Federal: What are your thoughts on frequent calls by economists on large cash transfers to the poor, migrants and other vulnerable groups affected by the current economic crisis? What do you think is holding the government back on implementing such a scheme?
Sen: Some cash transfers have happened but economists agree these are not enough. Government can’t make large transfers unless it increases the size of fiscal support. From the current ₹2 lakh crore, if the government decides to hike this to say, ₹8 lakh crore, the additional ₹6 lakh crore will have to be monetized by the RBI. Once that is done, the government can choose to put that money into cash transfers or into infrastructure development. The advantage of cash transfers is that they can be done much faster while infra spending takes time to fructify.
Federal: What are your estimates of the fiscal deficit for 2020-21, with the data currently available. How should the government manage its finances in these uncertain times?
Sen: Fiscal deficit has three components: revenue, expenditure and GDP. All three will move depending on what the government does. If it doesn’t spend, the economy will slow down significantly, which means revenue will come down as production gets affected. Fiscal deficit is revenue minus expenditure divided by the GDP. If expenditure remains constant but revenue continues to contract and the GDP falls, the fiscal deficit will go up anyway. But if expenditure is increased then the decline in GDP can be less and tax collections higher. The relative magnitudes need to be worked out in detail. So, I am not giving an estimate for fiscal deficit at the moment.