How’s the economy really doing?

If someone asks you how the Indian economy is doing, how would you answer? Would you say that the Gross Domestic Product and Gross Value Added (GVA) are both above 7 per cent, and so the economy is growing strongly? Or would you say that the Index of Industrial Production (IIP) has contracted for two straight months, so actually India isn’t doing too well? Or would you look at corporate and personal income tax collections and base your analysis on that?

There are multiple ways to arrive at an answer, but the problem is that each metric points in a different direction. Adding to the confusion is the fact that almost every metric put out by the government is incompatible with every other metric, even if they pertain to the same sector!

Different results

For example, look at the GVA in the manufacturing sector and compare it to the manufacturing component of the IIP. At the outset, you can say that both pertain to the manufacturing sector. But that’s where the similarity ends. While the IIP Manufacturing measures gross output, or the absolute amount produced by the manufacturing sector, GVA Manufacturing measures the total contribution of labour and capital in the manufacturing process, which is entirely different from gross output.

So you have a situation where GVA Manufacturing in the first quarter of this financial year stood at a very robust 9.1 per cent, but the manufacturing component of the IIP actually contracted by about 0.8 per cent in that period. What can the layperson make out of this? Total output is shrinking, but more value is being added to that output? What does that say about the sector? Nothing, without a degree in economics. Probably nothing worthwhile even with one.

Then, you have the problem of actual measurement. The IIP uses the figures of 2004-05 as the base year, against which all subsequent index movements are pegged. All other metrics, including GDP and GVA, and the inflation indices, have moved to a more recent base year of 2011-12. What good can come of a metric pegged to a base more than a decade in the past?

Or, for that matter, look at the all-important inflation figures put out by the government. There are two sets of numbers that come out every month, the Wholesale Price Index and the Consumer Price Index. As the names suggest, the former looks at the movement of prices across various categories at the wholesale level, while the latter looks at the movement of the prices that the consumer finally pays.

Add to this the fact that the two indices look at different baskets of products and have different weightage for each category, and you have a system that only the Reserve Bank of India can decipher. Hopefully.

The two indices moved in tandem — as they should — for a while. But then, at about the start of 2015, they began to diverge. At the height of their divergence, in September 2015, there was a 9 percentage point difference between the two indices, with the CPI at 4.4 per cent and the WPI almost exactly that, but in the negative!

So what does it mean that the two indices are now again converging and are closer to each other than they have been in more than two years? Can the person on the street glean anything from this information about how prices in the local market are going to move?

As mentioned earlier, tax collections are a useful metric to gauge income growth, since the naive assumption always is that if corporate and personal income goes up, then so will the government’s tax collections. But this is India, where only 5.5 per cent of the earning population pays income tax, and where a large chunk of corporates gets away with paying zero tax thanks to the various exemptions and tax havens they can avail of. Any picture arising from this data is by default a severely incomplete one.

Periodicity of data releases

Then we come to the periodicity of the data releases themselves and the enthusiasm with which they are cited. While it is important from a policy and transparency standpoint for the government to release industrial data on a monthly basis, what can one actually make out from such a granular analysis? It is more reliable to base analyses over a longer time period of, say, a quarter, than to agonise over the monthly variations of indices meant to aggregate something as large as the entire country’s industrial performance.

Nevertheless, experts in the media and industry alike take every monthly figure and scrutinise them as if they will actually provide some insight. Looking at the IIP, the monthly figures since 2011 have a standard deviation — or how much any given month’s performance can vary from the average — of 3 percentage points. What conclusions can anybody draw from data that swing so wildly on a monthly basis?

Finally, we come to one of the most important aspects of such data releases: data collection. Why is it that we are so sceptical of the quality of service provided by, say, an Air India employee, or even someone in a government office, but somehow hold the data collectors of the Ministry of Statistics as paragons of efficiency? We must apply the Government Inefficiency Discount to data collection as well, which further erodes the veracity of the numbers being put out.

So, all in all, when someone asks you how the economy is doing, answer accurately and say: “I don’t know.”

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