Macroeconomics

The lad(y) doth protest too much, methinks

  • Blog Post Date 13 October, 2017
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Former Finance Minister Yashwant Sinha has trashed the present government’s track record on economic management. In a recent article, economist Surjit Bhalla refuted Mr. Sinha’s claims with a point-by-point take-down. In this article, Dr Pronab Sen responds to Dr. Bhalla’s critique.

In a recent hard-hitting article, “I need to speak up now” (Indian Express, 27 September 2017), Mr. Yashwant Sinha, former Finance Minister, trashed the present government’s track record on economic management in no uncertain terms. Coming from a senior and highly respected BJP (Bharatiya Janata Party) member, it has expectedly set the cat among the pigeons. Spin machines on both sides of the political divide have been hyperactive in either taking advantage or doing damage control as the case may be. However, almost all the interlocutors have been non- or quasi-economists, with little contribution from the economics profession at large. Until now.

In “Data vs. gossip: Who should win?” (Indian Express, 30 September 2017), Dr. Surjit S. Bhalla, a well-known professional economist, takes on Mr. Sinha with a point-by-point take-down, supposedly on the basis of facts. I hold no brief for Mr. Sinha, but, as an economist myself, I feel it incumbent on me to address Dr. Bhalla’s critique on behalf of our profession.

Dr. Bhalla’s broadside begins with Mr. Sinha’s statement: “according to the old method of calculation, the (GDP) growth rate of 5.7 per cent is actually 3.7 per cent or less”. Dr. Bhalla, entirely of his own volition, attributes this to mean the estimation of industrial growth using corporate data, and triumphantly proclaims that since the Index of Industrial Production (IIP), which was earlier used to measure growth of gross value added (GVA) in industry, is 1.9% for the quarter under consideration as compared to the actual estimate of industrial GDP (gross domestic product) growth of 1.6%, the CSO (Central Statistics Office) has underestimated the growth and not overestimated it.

Coming from a former member of the National Statistical Commission, such a statement is inexcusable. Dr. Bhalla should have remembered that the IIP growth figure was never simple-mindedly applied to derive the growth rate of the sector. This was done by applying IIP growth rates at the “compilation category” level and then re-aggregating. The resulting growth rate can be, and usually is, very different from the overall IIP figure. Whether it is higher or lower I have no idea, and only the CSO can tell, but simply quoting the IIP figure is egregious use of statistics.

However, more importantly, what gives Dr. Bhalla to think that Mr. Sinha was referring only to the industrial sector? In the quarterly estimates, corporate data is now used for a number of sectors including various services. In my reading, Mr. Sinha was essentially alluding to his belief that the non-corporate sector has performed much worse than the corporate, because of demonetisation and GST (goods and services tax), and this difference is not getting reflected in the GDP estimates. The error that he made was in using the phrase: “according to the old method of calculation”. What he perhaps should have said is: “taking into account the performance of the non-corporate sector…”. Mr. Sinha may be forgiven for this phraseological lapse – he is neither an economist nor a statistician – but Dr. Bhalla, who is both, should have known better.

However, Dr. Bhalla is quite right in stating that there is: "no evidence on the damage done by demonetization". Of course, there is no hard evidence – because we have no way of measuring the value-added in the non-corporate sector on an annual basis, let alone quarterly, except in agriculture and, to a much lesser extent, in construction and trade. By and large, India's GDP measure estimates value-added in the non-corporate sector from its data on the corporates. But here is the thing – scientifically speaking, lack of data allows one to only disagree, not to refute. Is Dr. Bhalla willing to publicly state that he believes that the non-corporate sector is doing at least as well as the corporate?

He doesn’t quite do that, but he does the next best thing – first, provide indirect evidence that the Indian economy is doing just fine; and second, provide an alternative reason for the sequential slowdown during the last five quarters. The contradiction seems to elude him altogether.

As far as the first is concerned, he uses rural real wage rates of ploughmen and carpenters to argue that there is no fall in labour demand in the country post-demonetisation. This argument has been conclusively demolished by Himanshu (“Face the decline”, Indian Express, 6 October 2017) on grounds of cherry-picking, and I have nothing to add.

Let me then take up the second. He agrees that the slowdown is “a self-inflicted … wound” resulting from “the exorbitantly high real interest rate policy followed by the MPC (Monetary Policy Committee)”. This is really clever since it simultaneously absolves demonetisation and GST from blame, and shifts the responsibility from the government to the Reserve Bank of India (RBI). The “evidence” he provides is on increase in real interest rates during this government’s tenure compared to: (a) Mr. Sinha’s tenure as Finance Minister; and (b) major emerging markets. How either of these is relevant eludes me. Surely the end points matter.

Nevertheless, interest rates can be deemed “exorbitantly high” only in comparison to some conceptually accepted benchmark. There are only two in existence that I am aware of: (a) the social rate of time preference; and (b) the log-run neutral real rate of interest.

The first is a political call on how much a society values the consumption of the present generation over consumption of future generations. In developing countries like India, with high levels of poverty, this rate should be high. The last time this was articulated was by the Planning Commission at 4%, and we have not become so much richer that it would have declined significantly.

The second is more technical and is defined as the rate at which the economy grows at its long-run potential with stable inflation. This is hard to estimate, but in developed countries it was earlier believed to be around 5% and is now estimated to range between 1.5% and 2.5%. In a country like India, which has high underemployment, a growing labour force and low current productivity, potential long-term growth is much higher. Practically everybody, including Dr. Bhalla, believes that India’s growth potential is around 8% at least as compared to the developed countries’ 3%. If this is indeed the case, and one would be termed ‘anti-national’ to suggest otherwise, the neutral rate of interest should be much higher, certainly upwards of 4%.

As things stand, the real repo rate has been below both these benchmarks except for a few isolated months (it is currently at 2.7%) and so has the 10-year T-bill yield (3.4%). So I really do not know what he is talking about. True, there have been brief periods when these rates were above the benchmark entirely because of volatility in inflation rates, but surely one does not play yo-yo with policy rates.

At the end, Dr. Bhalla “… wishes and hopes that the opinionatti would use a minimum of evidence in their expert commentary on the Indian economy.” Sadly, that is exactly what he does – use a minimum of evidence. This is unfortunate coming from an avowed empirical economist. Perhaps his recent anointment as a member of the Economic Advisory Council to the Prime Minister (EAC-PM) may have something to do with it.

This article is based on the author’s article: “The takedown that isn’t”, Indian Express, 11 October 2017.

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