In variance with the official growth story

Surveys, including the recently leaked one on consumer expenditure, point to the economy’s dire state

How fast has India grown lately? And, what are the yardsticks on which the country’s performance is being measured? These have remained contentious questions. Following the last decade’s boom, the economy was slowing after 2011-2012, but apparently turned around under the National Democratic Alliance (NDA) regime. Until very recently, the government claimed the economic success was based on a consumption-led growth model, as against investment-led growth in the previous decade.

In early 2015, the Central Statistics Office (CSO) released a new series of National Accounts with the base year of 2011-2012, replacing the earlier series with 2004-2005 as the base year. This is a routine exercise for any statistical office. Surprisingly, however, the annual GDP growth rates were distinctly higher in the new series compared to the old series: the growth rate for 2013-2014 went up sharply from 4.8% in the old series to 6.2% in the new series. Similarly, the manufacturing sector growth rate for 2013-2014 moved up from (-)0.7% to (+)5.3%. The revised estimates drew widespread scepticism as they were out of line with economic correlates, such as bank credit growth, industrial capacity utilisation and growth in fixed investments, all of which showed a downward trend.

‘Expansion’ after note ban

The height of dissonance was for 2016-2017 when, due to the demonetisation of high-value currency notes, output and employment contracted by most professional and popular accounts. Yet, surprisingly, the official figures showed domestic output expanding by 8.2% during the year — the highest in a decade — to the dismay of most observers and international agencies. Dismissing the criticism, the CSO claimed that the new estimates were kosher as, the agency said, they were based on: first, the latest global templates for estimating GDP; second, improved methods; and third, much larger data sets.

Defending the higher growth estimates, the government contended that traditional surveys had failed to capture output and employment generated in the newer platforms and digital economy (such as through Ola and Flipkart), and the outcomes of various micro- and industry-specific initiatives such as MUDRA and UDAN.

Further, increase in membership of social security measures such as Employees’ Provident Fund (EPF) and Employees’ Social Insurance (ESI) were taken as credible evidence of high employment growth flowing from output expansion, and of formalisation of the economy (with desirable social security provisions for workers). But the evidence provided did not cut much ice since the organised sector accounts for at best 15% of the national workforce, leaving out rural and urban informal sectors.

It was, however, not possible to obtain economy-wide measures of the employment and household consumption, as the government had scrapped the National Sample Survey Office (NSSO)’s time-tested five-yearly household surveys (which combined both). The Periodic Labour Force Survey (PLFS) that replaced the NSSO’s Employment, Unemployment Survey (EUS) was conducted in 2017-2018, and a separate household consumer expenditure survey was canvassed in the same year.

The PLFS’s results — initially leaked last year, but officially released in May this year — showed some disturbing trends. First, they revealed that unemployment rate had risen to 8.3% of the labour force, the highest in over 40 years. Second, the results showed that, for the first time ever, employment level had declined: between 2011-2012 and 2017-2018, the estimated fall in employment was in the range of 6.6 million to 15.5 million (depending on varying assumptions about the population growth rates).

Third, the survey demonstrated that wage rates had stagnated both in rural and urban areas. The government, however, rejected these estimates, arguing that the PLFS data are not strictly comparable to the (earlier) EUS data — a claim rubbished by most knowledgeable statisticians.

Common sense would suggest that such widespread distress in the labour market would reduce private consumption. This was precisely what the leaked consumer expenditure surveys’ data showed: monthly per capita consumer expenditure had fallen for the first time since 1972-73. Further, between 2011-12 and 2017-18, the monthly per capita consumer expenditure in real terms (adjusted for inflation) had fallen by 3.7%, from ₹1,501 in 2011-2012 to ₹1,446 in 2017-2018. Over the six years, there was a decline in expenditure in rural areas by 8.8% and a marginal rise of 2% in urban areas. The government scrapped the consumer expenditure survey data, as they were at variance with the administrative data.

Thus, the best available, up-to-date, nationwide sample surveys tell a consistent story of the economy being in a dire state. They demonstrate that there have been unprecedented job losses, wages have stagnated, and per capita consumer expenditure has either stagnated or fallen. By implication, poverty rates (measured by an absolute level of consumption translated in money terms) are likely to have gone up. This is the clearest nationwide evidence we can get on the economy being in distress in the current decade.

Changes in methodology

Yet, the official GDP estimates show a respectable level of 5%-6% average annual growth rate in the past few years, though the rate is declining. The divergence raises the question: are the numbers really plausible given that macroeconomic parameters in the labour market and private household consumption have slumped? There seems to be something amiss in the GDP estimates, closing the loop where we began: GDP growth rates seem over-estimated on account of the questionable changes in methods and use of unverified data sets. In reality, the output growth has probably been far lower than the official estimates — as shown by statistical exercises to validate the official GDP estimates.

To sum up, since 2015, two distinct yet related narratives have dominated the economic discourse: one, the official GDP growth rates have been overestimated in the revised National Accounts and two, there is a lack of correlation between GDP growth rates and many macro variables. However, dismissing such scepticism, the government has maintained that the higher growth rates reported by the revised GDP series truly reflect a booming consumption-led economic growth model.

If the leaked consumption data are true, the decline in monthly per capita expenditure in real terms between 2011-2012 and 2017-2018 puts a question mark on the official growth story. The decline in consumption is in line with the fall in employment and wage stagnation, as reported by the official PLFS data. Hence, the latest leak seems to not only question the official growth story, but also supports the contention raised about a possible overestimation of GDP growth rate in the current series on account of questionable methodological changes and introduction of unverified data sources for estimating domestic output.

R. Nagaraj is with the Indira Gandhi Institute of Development Research, Mumbai

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Printable version | May 27, 2020 2:00:05 PM |

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