Wednesday, March 13, 2024

India: GDP data for Q3 2023–24 , the real story | Arun Kumar

 (Published in The Leaflet)

GDP data for Q3 2023–24: The mystery of a robust growth

Recently released GDP figures have sprung a surprise, baffled experts and overturned the government’s own data and projections. What could be the reason?

GROSS Domestic Product (GDP) figures have sprung a surprise— showing a growth of 8.4 percent in Quarter 3 of 2023–24, on top of the previous two quarter’s growth of 8.2 percent and 8.1 percent.

The annual growth for 2023–24 is projected at 7.6 percent. But given the growth rates in the first three quarters, it is likely to be above 8 percent, unless the economy decelerates sharply in Q4, of which there is little sign.

The surprise

Experts are embarrassed that how could they be so far off. In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

Various foreign credit rating agencies had revised the expected growth rate to only around 6.5 percent. The International Monetary Fund (IMF) expected a 6.3 percent rate of growth.

In December 2023, the Reserve Bank of India (RBI) had upped its projected growth rate from 6.5 percent to 7 percent.

The Union finance ministry of India said that the rate of growth would be comfortably above 6.5 percent, but did not say it would be over 8 percent. The largest Indian bank, which usually gives a glowing picture of the economy, which then gets amplified in the media, just a day earlier had predicted a rate of growth of between 6.7 percent and 6.9 percent. It argued that there was a moderation in economic activity in Q3.

Media reports had been mentioning that the festive demand in October and November had been moderate— not the expected big boost to economic activity.

Reports were that the rural market was subdued. El Nino was being mentioned as a reason for problems in agriculture. High cereal prices, in spite of a ban on exports of rice and wheat, were being cited as a reason to doubt the official production figures of agriculture.

Also read: The K is Indian GDP’s reality: Why deny?

A moderation of profits in the corporate sector due to a slowdown in demand was being cited as another signal of slow growth. The war in Gaza was creating problems in shipping and leading to an increase in the prices of imports.

A slowdown in China, Europe, Britain and Japan was the reason for the slowdown in exports. All these were the reasons why the Q3 numbers were expected to herald a slowdown.

Despite these factors, growth has accelerated. This mystery needs to be resolved.

Data points to growing disparities

Sectoral performance compared to Q3 of 2022–23 shows higher growth in manufacturing, mining, electricity, gas, public administration and so on.

There has been a sharp increase in mining, from 1.4 percent to 7.5 percent, and in manufacturing from -4.8 percent to 11.6 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent. In the case of construction, growth remains unchanged at 9.5 percent.

In the case of group trade, hotels, etc., growth declined from 9.2 percent to 6.7 percent, for the group of financial, real estate, etc., the drop is from 7.7 percent to 7 percent. The biggest drop is in the group agriculture, livestock, etc., from 5.2 percent to -0.8 percent.

Another boost is from net taxes, which have increased from -2.6 percent to 32 percent.

Analysis of the expenditure components of GDP shows a decline in the share of private final consumption, from 61.3 percent to 58.6 percent and government final consumption from 8.7 percent to 7.8 percent. The external sector, represented by exports minus imports, shows a decline from -0.7 percent to -1.8 percent.

These three engines of growth are pulling growth down.

So the growth acceleration is coming from an increase in Gross Fixed Capital Formation, from 31.8 percent to 32.4 percent, in valuables, from 1.1 percent to 1.7 percent and in discrepancies, from -3.3 percent to 0.2 percent.

Also read: GDP growth: The gap between reality and rhetoric

This pattern of increases and decreases in different components of GDP can help resolve the mystery.

First, the sharp increase in net taxes suggests that the incomes of tax-paying citizens have risen sharply. They belong mostly to the organised sector of the economy.

The unorganised sector hardly contributes to the taxes since most of the incomes of this sector are below the taxable limit and they are exempt from the Goods and Services Tax (GST).

So, the sharply higher net tax collection indicates that incomes of the well-off sections belonging to the organised sector have sharply increased.

Second, the decline in the share of consumption in GDP also points in the same direction. The well-off citizens consume a smaller percent of their income while the poor consume most of their income. Thus, a shift of incomes in favour of the well-off will lead to a decline in the share of consumption in GDP.

Third, the decline in the share of agriculture in GDP also suggests the same. It is the largest component (in employment terms) of the unorganised sector. About 85 percent of the farmers are small and marginal cultivators operating less than 5 acres of land and have low incomes from farming. As their income declines, the share of consumption in GDP would drop.

Fourth, the government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, the government’s capital expenditure is shifting towards capital-intensive sectors and away from labour-intensive ones. This boosts the organised sector at the expense of the unorganised sector.

Also, the government’s stated aim is to formalise the economy through digitisation which is damaging the unorganised sector and benefitting the organised sector.

Also read: A taxing tale: Assessing the impact of six years of GST

Finally, the sharp increase in the ‘discrepancies’ points to the errors in the data. Both the production side and the expenditure side of GDP have large errors. To unravel the mystery, there is a need to understand these errors.

Contradictions in GDP data

For the quarterly GDP estimation, the unorganised sector (except, for agriculture) data is not available. That is also the case for most of the organised sector. So GDP estimation is based on various assumptions and approximations. How valid are these?

According to the press note, GDP estimates are based on ‘indicators’, ‘using the benchmark-indicator method’.

The government has shifted its expenditure towards capital accounts so the share of its consumption has declined.

Further, previous year estimates are ‘extrapolated’ using relevant performance indicators. Indicators used are the Index of Industrial Production, the financial performance of listed companies in the private corporate sector, air and rail traffic, etc. These are largely from the organised sector.

In brief, the quarterly estimates are largely based on limited organised sector data (but for agriculture). The limited organised sector data is used to proxy the unorganised sector. This washes out the decline in the unorganised sector and the economy appears to be doing well.

This is not the only lacuna. Projections from the previous year’s data are used. If the previous year’s estimates were in error, that would impact the current year’s estimates.

If the economy suffers a shock, a projection from the previous (normal) year would overstate growth. The methodology would require a change. That would be true for the pandemic and the accomopanying lockdown, and demonetisation. The impact of the shock would continue to affect the estimates, based on projections from the previous year, for several years.

Also read: Is the decline in multidimensional poverty in India real?

Consumption data from the recently released household consumer survey shows per capita rural and urban consumption as ₹3,773 and ₹6,459 per month. But GDP data gives a figure of ₹9,896. This is a result of over-estimating the production of the unorganised sector which produces a large part of the consumption goods.

Thus, even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

Conclusion

The above points to why even if parts of the economy are languishing, GDP data shows the opposite. This is not just to do with the large gap between GDP and Gross Value Added.

Even when the economy is not performing well, the method of estimation of GDP will show good growth, as has happened with Q3 of the financial year 2023–24.

There is evidence of growing disparity in the economy since the unorganised sector is declining while the organised sector is growing— the K-shaped pattern of growth. The recently released Consumption Survey data also points to this.

Clearly, the method of estimating the quarterly GDP based largely on organised sector data overestimates growth, especially when there is a shock to the economy.

At best, the recently released GDP data represents agriculture and the organised sector but not the entire economy. 

 

 

Friday, March 1, 2024

Which Data Can We Rely On? | Arun Kumar (in The Wire)

 The Wire

The methodology of data collection for the latest Household Consumption Expenditure Survey has changed in this round. Therefore, the survey results raise a lot of questions since alternative data is at variance with it.

New Delhi: The government has released the Household Consumption Expenditure Survey (HCES) for the period of August 2022 and July 2023 earlier this week.

The survey generates estimates of households’ Monthly Per Capita Consumption Expenditure (MPCE) and its distribution. However, only the summary results have been released as of now, in the form of a factsheet (along with Annexures). The detailed report is expected to be brought out subsequently.

The survey report has been released after 2011-12. In between, a survey was done in 2017-18 but its report was not released by the government because it did not suit its narrative. This gives rise to suspicion that reports are released selectively. It also gives rise to the possibility of manipulation of data collection and the way it is officially presented.

HCES 2022-23 does show consumption rising across the board while the leaked report of 2017-18 showed a decrease in consumption. This has enabled officials to claim that poverty in India has declined and less than 5% of the population is poor. At current prices, the increase in average consumption looks impressive. It increased 164% in rural areas to Rs 3,773 and in urban areas by 146% to Rs 6,459. But most of it is due to inflation. Adjusting for inflation, the real increase is 40% and 33.5% for rural and urban areas, respectively. This is in 11 years.

During this period, officially, the net national income has risen from Rs 77.42 lakh crore to Rs 133.48 lakh crore, which is an increase of 72.34%. In other words, consumption growth is way behind the growth in incomes.

Inference on inequality?

If the poor were getting higher incomes, they would spend most of it in consumption since they are unable to fulfil their basic needs. Their consumption should have risen at a much faster rate than the new data shows. It can be inferred that most of the income increase has been for the higher echelons of the income ladder. These well-off save a large fraction of their incomes since they do not need to spend much more on increasing their consumption. The implication is that inequality in incomes is increasing in the country.

What the HCES data shows is the consumption inequality. The more relevant factor is income inequality. And, that is much higher than the consumption inequality since those with higher incomes save more.

This is consistent with the argument that the organised sector of the economy is growing while the unorganised sector is declining. The unorganised sector consists of agriculture and micro and small sectors of the economy. The agricultural sector has been in crisis for a long time as evidenced by the repeated protests staged by farmers. The micro and small sectors’ growth has been declining since at least demonetisation in 2016. This is consistent with the growth pattern of the economy being K-shaped.

The latest taxation data also suggests the same. Officially, it is said that there is high buoyancy – that is, tax collections are rapidly rising. But, in the Indian economy, the vast bulk of the tax is paid by the organised sector. Corporation tax and income tax are paid by the well-off. The prime minister has said that only 1.5 crore individuals (1.1% of the population) are effective taxpayers. GST is collected largely from the large- and medium-scale units since the unorganised sector is largely exempt or in the composition scheme paying a tax of 1%. The finance ministry’s data for 2023-24 shows net tax collections rising at 23.4% when the GDP is growing at 8%. This threefold increase in tax collection reflects the organised sector’s growth. It can only be at the expense of the unorganised sector.

Also read: K-Shape Widens: In 5 Years, Govt Tax Collection From Individuals up by 76%, From Corporates Only by 24%

Inference on poverty

The NITI Aayog has been quick to claim that the data supports the argument that poverty has decreased in India from 2011-12 to 2022-23. The data shows a drop in the share of expenditure on food.

However, several factors must be taken into account when saying that poverty has declined.

[According to Engel’s Law, the percentage of income allocated for food purchases decreases as a household’s income rises, while the percentage spent on other things (such as education and recreation) increases.]

Firstly, the volume of consumption is not given. It could be that the increased absolute expenditure on food items is a reflection of an increase in the prices of those items. When the full data is released, then only one would understand this better.

Second, what is the poverty line that is being used to claim that poverty has declined? Poverty has to be defined as ‘minimum social necessary consumption’. This is space and time specific. So, it keeps changing. The World Bank has changed its poverty line recently from $1.9 to $2.15 per person per day. This amounts to about Rs 26,000 per family of five per month. Even adjusting for nominal dollars, it would be about Rs 10,000 per family per month. If this poverty line is considered, then the number of poor would be much more than the 5% being quoted by officials.

Third, 300 million people have registered on the e-shram portal, and 90% of them have said they earn less than Rs 10,000 per month. Given the level of unemployment, this would imply that most of these people would fall in the category of being poor.

Fourth, the share of expenditure on health and transportation etc. has increased. For the poor, an increase in the cost of travel would be necessary to earn their livelihood, and would not mean that they are better off. Health expenditures are likely to be even higher than stated, given the recovery from the pandemic, and it would not represent a better off family but a poor family struggling to survive.

Fifth, the increase in demand for work under MGNREGS means that people’s incomes have not recovered to pre-pandemic levels. They are still struggling.

Sixth, the level of malnourishment remains high among women, as per the NFHS data. Would these families be spending a lower percentage of their income on food? Would they be buying more of the prepared food (packaged) from the market?

Seventh, high unemployment, under-employment and low labour force participation ratio suggests that incomes could not have recovered, and correspondingly, consumption could not have recovered.

Eighth, could there be higher consumption due to the government welfare measures. The data released provides information on the increase in consumption on account of these programmes giving free items (called ‘revdi’ by the prime minister) like food. On an average, this increases consumption by Rs 87 in rural areas and Rs 62 in urban areas. It is even lower for the poorer sections. It amounts to an increase in consumption of 2.3% for the rural areas and 1% for urban areas. Thus, either the argument that the government is giving a lot of support to the poor is incorrect or the benefits are not reaching the poor.

In brief, more detailed data would be needed to say something definitive about poverty declining.

Conclusion: Premature comparison

The official document mentions that the methodology of data collection has changed in this round compared to earlier. It is no more a consumer survey but a consumption survey. Consumption is split up into three broad categories and the data is collected separately on each one of them. In surveys when the method of collection changes and the questionnaires change, responses become non-comparable.

There has always been a problem in collecting the data of the wealthy and the poor. At both ends of the spectrum, the enumerators do not get a proper response. Thus, even inferring about inequality becomes difficult.

In brief, it is good that the data on consumption has finally come out. But it raises a lot of questions since alternative data is at variance with it. There is also a controversy about the follow up survey being done to test if the 2022-23 survey is robust. This is necessary since the methodology has been changed compared to the earlier consumer surveys. Maybe the full survey results will help clear some of the doubts.

Arun Kumar is author ofIndian Economy since Independence: Persisting Colonial Disruption (2013) and Indian Economy’s Greatest Crisis: Impact of Coronavirus and the Road Ahead (2020).

Wednesday, February 28, 2024

'Modi Sarkar Ka Naya Survey' - Household Consumption Expenditure Survey Deciphered | Arun Kumar

https://www.youtube.com/live/E4ua6IGFT5g?si=lTE_y7K8Ixspz4Pr

On Electoral bonds, black and elections | Arun Kumar

 The Leaflet

Black economy persists with or without electoral bonds

India’s democratic model needs an overhaul so that elections are not an expensive affair. Only that can create a more just, transparent and efficient system, argues Prof. Arun Kumar.

THE electoral bonds scheme has been declared unconstitutional. Various legislative and administrative amendments, implemented to facilitate the scheme, have also been declared unconstitutional. This is a victory for those opposing this scheme.

The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality. The right to privacy of the donors has been held to be less important than the citizens’ right to information about the candidate for whom they were voting.

This is a rare judgment in the last few years that has gone against the establishment’s view. Judgments such as those on Aadhar, demonetisation and Article 370 sided with the establishment’s view even though the court did raise probing questions during the hearings.

Be that as it may, the electoral bonds case was of little consequence for the ruling establishment, even though it has huge significance for transparency and for conducting fair elections.

The government’s argument that the scheme was needed to help reduce the use of black money in elections has not been accepted on grounds of proportionality.

The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.

Since a vast majority of the bonds were of denomination ₹1 crore and above, these were bought by the rich to donate to their preferred party. The suspicion has been that these payments were bribes in white, to get favours.

Also read: No bond with Article 19: Supreme Court declares electoral bonds unconstitutional, directs SBI to stop issuing them

There were donations to the opposition parties also but that is an investment in the future, in case a party comes to power. Even if it does not come to power, donations could ensure that the opposition raises inconvenient questions of the government.

The Order to reveal the names is likely to be resisted. An appeal against this could be filed. Attempts will be made to connect donations to the ruling party with favours granted. Donations to the opposition parties that are in power in one state or the other can also be so branded.

But, the ruling party at the Union level is the one that can grant big favours and it has received the vast majority of the bonds. How does all this link up to black money?

Elections and black money

In India, huge sums of money are spent on fighting elections. These are way above the election expenditure limits set by the Election Commission of India (ECI), hence illegal.

If these are declared by the candidates, their election will be annulled. So all expenses above the election expenditure limit have to be funded illegally— by black funds.

Election expenditure limits are now ₹95 lakh and ₹70 lakh for a parliamentary constituency and ₹40 lakh and ₹28 lakh for assembly elections. Actual election expenditures are unofficially reported to be around ₹40 crore for a parliamentary constituency and ₹6 crore for an assembly constituency. The actual numbers for a parliamentary and assembly election are respectively 40 and 15 times the allowed limit.

The court has ordered the revelation of names of the recipients and donors— which entity paid and which party received.

The reason for the high expense by candidates is the need for high-power campaigns to overwhelm the citizens to stand a chance to win. Expenses are on maintaining vote banks, bribing voters in cash and kind, hiring workers and musclemen, paying for crowds for rallies and meetings, spending on cutouts and posters, paying media for coverage, etc., and disrupting the opponents’ campaign. These are all substitutes for a lack of adequate attention to constituencies.

Also read: Donor anonymity versus voters’ right to know: Supreme Court reserves judgment in electoral bonds case

Effectively, the expenditure of large sums in elections reflects the weakness of Indian democracy. The public votes for reasons other than the hard work and honesty of candidates.

Instead, candidates have to entice the voters with bribes of various kinds. Also, India is largely feudal, so the public is guided either by those in authority or by emotional issues and not by individual self-interest.

Finally, issues have become complex and the public’s understanding is minimal, which also prevents questioning of authorities. Many can be heard saying, ‘Voting for a losing candidate is wasting the vote.’

The consideration is not a better representation but who appears to be more likely to win irrespective of what they stand for.

Electoral bonds and black money

Electoral bonds were donated to a political party and not a candidate. So the money went to the party. Since there is no limit on expenditure by a political party, it can get all it needs in white and spend it.

If a part of the donation was given to the candidates then the expenditure would be reduced to come under the ceiling set by the law. So the parties did not need to give the money raised through electoral bonds to the candidates and instead could spend it entirely on a general campaign, organised centrally.

The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy.

If all the money raised via the bonds was to be given to the candidates, then only ₹95 lakh per candidate could be given for a parliamentary constituency. So, for a parliamentary election, the party would at most need ₹513 crore. But the ruling party has been getting more than a thousand crore rupees per annum since 2019.

Obviously, the money received was used for other purposes, such as setting up offices, running them, logistics and social media cells.

Political parties also engineer defections, topple opposition governments and so on. This cannot be done via legitimate money and requires black money which is donated in cash by the backers of the party.

Also read: Electoral bonds: A landmark judgment in the direction of free and fair elections 

This money cannot be shown on the balance sheet of the parties and cannot be caught in an audit of the accounts of the party or the candidates. The ECI cannot catch it.

Businesses in India know how to manipulate incomes and expenditures outside their balance sheets to generate black incomes. Under- and over-invoicing and hawala are used for these purposes.

These methods keep one step ahead of the changes the tax authorities make in the laws and rules with the help of income tax lawyers and chartered accountants. Such methods are also available to political parties and candidates for their financial accounting so that they do not get caught using black funds.

So, apart from the funds made available by the electoral bonds, the parties and the individual candidates continued to use black funds. Thus, the non-availability of funds from electoral bonds will hardly change the funding pattern of the parties and there will be no impact on individual candidates.

In brief, funds received via the electoral bonds were: a) In addition to the money received in black and, b) The amount received was small compared to the total requirement.

What to do?

The use of black funds in elections reinforces illegality in society and thereby undermines representation and democracy. Parties and individual candidates who accept large sums of black money are indebted to the donors and do their bidding when they get into power.

Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers. 

This is the implicit and explicit understanding between the two parties. A nexus forms. Outwardly, parties and candidates make a show of wanting to curb the use of illegal funds but that is not the reality.

Also read: Electoral bonds: No solution to illegal political funding

Democracy gets diminished when people vote for the corrupt who largely appear at the time of elections and make promises that they do not deliver on once in power.

People do not get genuine representation from their representatives who serve the interests of a few powerful entities. But people are helpless since the candidates put up by the parties for elections are all similar— they are beholden to the vested interests and do their bidding once they come to power.

Politics will be cleaned up if the public does not get swayed by emotionalism, sectarianism, etc., and voted on objective factors impacting them.

Currently existing parties and candidates are unlikely to change, so new parties are needed that have dedicated workers. Citizens have to become politically savvy to look after their long-term interests.

Since this would undermine the current ruling parties, they will create impediments to the emergence of new parties and honest candidates. The entire State machinery is available to them to coerce and harass and defeat their opponents.

Conclusion

In brief, it is not that in a robust democracy, elections need to be expensive. It is in the imperfect democracy that prevails in India where accountability is weak that elections become expensive.

In such a situation, an instrumentality such as the electoral bonds adds to non-transparency without impacting the black economy or the use of black funds in elections.

Actually, to survive, the black economy needs to control politics so that dishonest parties and candidates come to power.