What Do We Really Know About India's GDP? | Arun Kumar (The Wire - 4 Jan 2024)

 The Wire

There are two inter-related problems with the GDP data. The infirmity in the data and the invalidity of the method to calculate the GDP.

Arun Kumar

04/Jan/2024

This is the first article in ‘India Black Boxed’. Read the series introduction here.

Controversy refuses to die down about the size of India’s GDP and its growth rate. It all started when the new GDP series with base 2011-12 was released in 2015. Not only did analysts point to problems, the government itself was unhappy that it showed a higher growth during the UPA’s ten years compared to the post-2014 NDA period.

The pandemic in 2020 severely dented the economy and the economy witnessed its steepest decline since Independence. The recovery from this low base was also steep. This has led to the official claim that India has done well in spite of the pandemic and the war in Ukraine to become the fastest growing major economy in the world. Is this the correct picture of the economy? That depends on the accuracy of the numbers and the policies formulated on that basis.

Pre-pandemic controversies

Doubts about the accuracy of data in the new series from 2011-12 have risen on several counts. To begin with, when the new series was announced in 2015, there was no back series to compare it with. It was said that the new series was based on the MCA21 data base of the industrial sector, which was more complete than what was used till then, the IIP data. It was stated that the back series could not be generated both because the MCA21 data base had not stabilised earlier and the relevant data on employment became available from 2011-12.

But neither of these should have mattered since the MCA21 data base goes back a long time and earlier employment figures could have been used as has been often done. The real reason appeared to be political. Namely, to show higher GDP growth during the NDA period compared to the UPA period.

The next controversy was the government’s claim that the Indian economy grew at an average of about 7% during 2015-2020, which made it the fastest growing large economy in the world. This was undermined by A. Subramanian (2019). He showed that the growth rate was over estimated by up to 2.5% after 2014.

The next blow came when NSSO reported in 2019 that out of a sample of 35,456 companies taken from MCA21 data base, 38.7% were ‘out of survey’ units. These units are either not traceable or misclassified. So, data is either missing or mis-specified. Thus, the use of MCA21 for GDP calculation could be leading to errors in estimation.

The government argued that the inclusion of the ‘out of survey’ companies brings the output closer to the true production and there is no over-estimation of GDP.

A committee was set up to work out the missing back series. Its report showed that the rate of growth was higher during the UPA period compared to the NDA years. The government rejected it and in an unprecedented move, asked the NITI Ayog to rework the series. The NITI Ayog obliged and presented a back series showing that the rate of growth was higher during the NDA period compared to the UPA years.

Upward bias in GDP

The problem with the GDP data becomes clear when the official data shows that the highest rate of growth during the decade of the 2010-20 was in the year of demonetisation, 2016-17. From all accounts, starting November 2016, output was severely impacted in that year. Even if it is assumed that the output was growing up to October 2016, and declined after that, the average GDP growth became negative. This points to the flawed methodology used to measure GDP which gave an 8% upward bias to GDP in 2016-17. Even this flawed methodology showed the official growth rate declining from 8% in Q4 of 2017-18 to 3.1% in Q4 of 2019-20. So, the real actual rate of growth would have become negative even before the pandemic

Pandemic and the lockdown severely impacted the economy in 2020 and more particularly the unorganised sector. Subsequent recovery has been K-shaped – namely, some sectors growing while others (unorganised sector) declined. This decline has not been captured in data leading to over-estimation of the GDP. This becomes clear when one looks at the method of estimation of GDP, especially the quarterly GDP, which is what is usually discussed in public discourse.

Official methodology

I have previously analysed the official document which presents the `Methodology of Compiling Quarterly GDP Estimates’. It mentions three factors that need to be noted regarding the calculation of GDP from the supposedly more accurate production side:

1. “The production approach used for compiling the QGVA estimates is broadly based on the benchmark-indicator method.”
2. “In this method, for each of the industry-groups, estimates of GVA are compiled…”
3. “In general terms, quarterly estimates of Gross Value Added (GVA) are extrapolations of annual series of GVA.”

These three points clarify that for the quarterly estimates of GDP based on the production approach, most current data are not available so, benchmark indicators from an earlier reference year have to be used. The last survey of unincorporated enterprises was carried out in 2015-16 so that the reference year is now dated and does not capture the current reality.

Further, the methodology states that current figures are obtained by extrapolations of the annual series of GVA of previous years. But if the previous year figures are incorrect, how can their extrapolation be correct? This has been the case post the demonetisation, introduction of the Goods and Services Tax and the lockdown. Each of these three occurrences administered a shock to the economy and caused disruption.

Finally, in some cases, the procedure adopted is to make annual projections and then to divide them by four to give the quarterly figures. Two problems arise. First, there are varying levels of activity in the different quarters. For instance, there is heightened activity during the festive season, while it is low at the start of the financial year. So, division by four cannot be correct. Second, errors in the figures of the previous year get projected to the next year.

Shocks undermine the method

The methodology outlined above relies on a smoothly functioning economy. But it will not apply when there are big unexpected changes, called a shock, like due to demonetisation or the sudden lockdown. The shocks impact the basic parameters of the economy. Like the ratio of the unorganised to the organised sector or the real output in the agriculture sector. So, with a shock, neither the ‘benchmark-indicators’ will be valid nor will it be correct to extrapolate from a normal year to the next one that has experienced a shock.

The Indian economy has suffered several shocks since 2016. Demonetisation in 2016 followed by the introduction of the structurally faulty GST in 2017, the NBFC (non-bank financial company) crisis in 2018 and finally the sudden lockdown in 2020. Each of them impacted the unorganised and the organised sectors differentially, thereby changing the ratio between the two and invalidating the old benchmark indicators.

Further issues with quarterly data

The problems related to methodological issues were compounded by the data deficiencies. Even for the organised sector, only limited data is available. For instance, the corporate sector data representing industry is available only for a few hundred firms. In the case of agriculture, it is assumed that targets set by the ministry are achieved. But that has not been the case in the last few years due to heat or late rains or inability of perishable crops to come to the market during the lockdown and demonetisation, so that it rotted in the fields and agricultural output declined while it was taken to have increased. The method for estimating the unorganised sector in the GDP needed to be modified, but this has not been done.

In brief, there are two inter-related problems with the GDP data. The infirmity in the data and the invalidity of the method to calculate the GDP.

The problem was further compounded by the government’s lack of faith in its own employment data which it rejected in 2019 because it showed that unemployment had reached a high of 45 years. Since employment data is used in the calculation of the GDP, if it is rejected, the GDP calculation also becomes unreliable.

To persist with the methodology in the 2017 official document, new indicators are required based on fresh surveys. But no new survey of the unorganised sector has been conducted since 2015. Even the Census has not been conducted in 2021 and that compounds the problem.

Further, each of the shocks listed above impacted the economy differently. So, without a change in the method and resolving the data issues, errors get compounded and reliable GDP numbers cannot be generated.

Stance of international agencies

The government claims that international agencies, like the IMF and the UN, have supported its claims on GDP. Their figures for GDP growth differ from the official figures by a small percent. But that is not surprising since these agencies are not data collecting agencies and use the official data. Even the RBI uses the official data on a host of macro variables.

Effectively, all of them reproduce the errors in the official data and none of them have more accurate data. The surprise is that all these agencies ignore the data-related issues when the errors are glaring. Worse, if Indian data has such huge errors, other developing countries are likely to have similar or even greater errors, making international comparisons meaningless.

Impact on other macro aggregates

GDP data is the base used to estimate other macro aggregates, like consumption and savings. These affect the measurement of poverty and growing inequality. If growth is strong then it would imply strong growth in employment. But this link is broken since growth is in the organised sector while the unorganised sector is declining. The former hardly creates employment while the latter which provides a bulk of the employment is losing employment. So, this lopsided growth has broken the link between growth and employment.

Further, if the unorganised sector declines then the overall demand becomes short, leading to low capacity utilisation and decline in the investment rate and even the organised sector rate of growth will fall. This was visible in the period 2017-18 and 2019-20 (before the pandemic).

The incorrect GDP numbers should impact the fiscal situation. This is reflected in the revenue and expenditures often missing the targets set in the budget. The final figures differ considerably from the budget and revised estimates. But these revisions are not as stark as the errors in the GDP data should lead to.

The reason for this smaller error is that the budget is largely for the organised sectors and of the organised sector. The revenue collection is largely from the organised sector. Most expenditures are also for the organised sector. Where the expenditures pertain to the unorganised sectors like on food, rural development, education and health, revisions are made when the deficit in the budget increases. Thus, the budgetary calculus is not as seriously impacted as the large errors in GDP data ought to lead to.

Conclusion

To conclude, India’s GDP numbers are vitiated due to methodological and data-related deficiencies. This suits the ruling party’s political narrative of a well-functioning economy. By continuing to harp on these incorrect numbers and hiding the true facts, it adds to the non-transparency in the government’s functioning.

Arun Kumar is the author of Understanding Black Economy and Black Money in India.

This Christmas Act to Change for a New Dawn | Arun Kumar

Christmas celebrates the birth of a child who symbolizes the start of a process of mitigating the suffering of the marginalized. It reminds us of the dawn of a new era. 2,000 years later the suffering of the marginalized persists because of the ambitions and actions of the powerful in society. The day comes and goes. We celebrate the birth but seldom act on what it symbolizes.  
 
To really celebrate the occasion and give meaning to our greetings to each other, we must endeavour to mitigate the suffering of the marginalized. For that, we need to strive to change our thoughts and our actions. The emphasis has to shift from outward to inwards – from mechanically greeting our loved ones and acquaintances to resolving to change our thinking and our actions. This has become more critical in the present fraught times what with wars, increasing number of extreme weather events and growing social strife and atomization.
 
In the year going by, heart rending scenes from Gaza are a reminder of what has been a reality in many parts of the world – in East and North Africa, West Asia, Ukraine, etc. Destruction is increasing due to extreme weather events in the Himalayas, Kerala and overbuilt urban areas of India, forest fires and unseasonal heat and rains in various parts of the world, melting polar ice cap and the glaciers, etc.. These impact the marginalized, the most vulnerable, the most.
 
It is for us, the common people, to act to check the unbridled power of the rulers to create wars and destruction, check the power of the military-industrial complex, control our growing consumerism pushed by high powered advertising, check the misuse of the social media to create false narratives, etc. If we begin to act even bit by bit, change will come that will herald a new dawn that Christmas symbolizes and that will give real content to our greetings to each other.
 
My best wishes this Christmas for change in us and all around

Video: Unemployment and challenges in India [in Hindi]

 

COP28 sidesteps real issue of consumption of rich | Arun Kumar (in The Wire)

The Wire

by Arun Kumar

Reports are that in 2023, there have been times when the global temperature has been higher than 2 degrees Celsius above the pre-industrial level. This level of warming has been flagged as causing irreversible change. Already at the current average annual temperature level of about 1.3 degrees Celsius above pre-industrial levels, the number of extreme weather events has dramatically increased, resulting in growing distress, especially for the poor.

COP28 needed to plan for reversal of average global temperature from its current levels. But this does not seem to be on the agenda. A mitigation fund with paltry contributions has been proposed. The steps being discussed and the urgency required to reverse the rising average temperatures are not visible.
The challenge today is not just global warming but the multi-faceted environmental pollution. Oceans and fresh water bodies are being severely polluted. There is impact on marine life and contaminants (like micro-plastics and chemicals) are entering human food chains. Heavy chemicals and elements are damaging various human organs with consequences for human health and leading to the proliferation of diseases like cancer.

Production, consumption and pollution

Energy is required for the production of goods and services, their distribution and finally for consumption. Different forms of energy are available like electricity, wind power, burning coal, gas and petroleum products. Some are more polluting than others. For instance, burning fossil fuels like coal and diesel pollutes more than wind power or electricity from solar panels. Solar panels directly convert the sun’s rays into electricity while wind and hydro-electricity come indirectly from solar energy. These sources directly produce little or no greenhouse gases. However, production and setting up of solar panels and wind turbines also results in pollution.

Fossil fuels are stored green matter over millions of years and their burning produces greenhouse gases. Since they are easily available, their consumption has risen dramatically over time and that is leading to a massive increase in greenhouse gases in air and global warming. So, one is talking of what is less polluting and which releases the least amount of greenhouse gases.
 

Currently there are two problems. First, most of the energy is being derived from the wrong kind of sources, which pollute more than others and produce more greenhouse gases. Second, consumption is on the rise, so more energy is required. Consumption is of all kind of goods and services. They have to be produced, transported, distributed, etc. – all of which requires energy.

Further, as production becomes more concentrated, there may be economies of scale but more transportation and distribution are required. It is visible in the long supply chains and distribution networks. So, in spite of greater efficiency due to use of more energy efficient methods of production and transportation, overall energy consumption has continued to increase.
 

Essential and luxury consumption

Production and distribution is related to consumption by humans for improvement in their welfare. A part of the output is for investment, to enable production to both continue and increase. Another part of consumption is in the form of public goods which are jointly consumed, like army, parks, sewage and public health. So, to address the problem of pollution, one needs to address private consumption, government consumption and investment.

Consumption may also be characterised as essential and inessential. Food, water, clothing and housing are essential for life. Agriculture and livestock rearing which produce food are blamed for much of release of greenhouse gases. Apart from curbing waste in production of food, nothing much can be done about it. Public services are required for a civilised existence of citizens, so here too one can try to provide these more efficiently but these are required.

What can be curbed is inessential and luxury consumption. This has become huge amongst the well-off, government bureaucracy and the corporate sector, and can be curtailed to reduce pollution. Unfortunately, consumption has become the yardstick of standard of living. Vacations, eating out, travel, throwing away usable things, discarding rather than repairing gadgets, etc., have become a part of the practice of the well-off.

Due to the demonstration effect from rich countries, the well-off in the developing world have copied wasteful consumption. The poor and the middle classes in the developing world try to emulate these consumption patterns. Advertising is used by producers to induce more consumption, not only among the well-off but among the less well-off and the poor. They are euphemistically defined as aspirational or those who want to consume more and can be induced to consume more in the future.

Consumerism has become ingrained in life. It stands for consumption for the sake of consumption. Tremendous amount of waste is generated in producing and throwing away things or in fancy packaging, luxury five star living, etc. The poor are not a part of such behaviour.
Skewed consumption pattern

So, who is consuming how much and therefore responsible for how much of the pollution?

The Delhi socio-economic survey of 2018 can be used to get the approximate consumption pattern. Translated to the all-India level, it suggests that 90% of Indian families spent less than Rs 10,000 per month. So, about 120 crore Indians consumed less than Rs 2,000 per month. This gives an annual consumption of less than Rs 28.8 lakh crore. 98% of the families consumed less than Rs 20,000 per month. Assuming an average of Rs 15,000 per month of family expenditure for those between the 90% and 98%, each individual in this bracket was consuming Rs 3,000 per month. Their consumption would be Rs 3.8 lakh crore. This 98% has little spare resources to waste or spend on luxury consumption.
Only 2% of the families in India were rich and consumed the maximum. In 2018-19, national income was about Rs 167 lakh crore. Of this about 58% was private consumption amounting to Rs 96.9 lakh crore. Subtracting the consumption of the 98%, the consumption of the top 2% turns out to be Rs 64.3 lakh crore or Rs 23.8 lakh per person. Their consumption was 66.36% of the total and they are the real polluters because they have the money to spend on luxury items and inessentials. The picture today will not be very different from that in 2018.

The poor in India are also recyclers of a lot of the waste produced by the well-off. So, their net environmental impact is smaller than implied by their consumption. The poor do cut corners and pollute but that is done for survival and not for luxury. Finally, the poor are also forced to produce cheaply for the developed world.

The consumption of the well-off requires a lot of imports of automobiles, electronic items, specialty items, etc. Even when these are produced in the country, a lot of their parts are imported. To balance trade, exports are required. India exports a lot of the low and intermediate technology products like, textiles, leather goods and toys where it faces competition from the other developing world nations. So prices have to be kept low (competitive). This is achieved by sacrificing environmental standards and paying workers low salaries. In other words, the developing world accepts a polluted environment for the sake of the developed world.

COP not discussing the real issue

The 28th Conference of Parties is taking place but the real step required, namely, cutting consumption globally, is not on the agenda. Use of cleaner energy sources will help but it will not be enough.
There is the free rider problem – each nation expects others to take the steps required. The rich nations are blaming India and China for being the big polluters now. The latter blame the rich nations for the historical accumulation of greenhouse gases and is asking them to pay for it and to make available new technologies to reduce production of greenhouse gases. The rich nations are not offering to lower their per capita consumption. They see this as a lowering the standard of living their people. The developing nations like India are not offering to pursue policies that would reduce the consumption of the well-off. They see this as a reduction of their growth rates.

Both the rich and the developing nations are protecting the interest of their corporations and their well-off whose growing consumption leads to higher profits. Both want to persist with growing consumption of their elite, corporate culture and wasteful governments. This shows where the real political power in the World lies – the slogan 1% against the 99% is apt. The cost of deliberate obfuscation falls on the marginalised – whether the poorer nations or the poor in each of the countries.
 

Conclusion

In brief, climate change and growing pollution are upon us and imposing heavy costs on all. Yet, the political will to take the drastic steps required is missing. The time for taking incremental steps is over. The fear that cutting consumption and production will reduce welfare for the elite and reduce employment is unfounded because these can be achieved by cutting social waste and inessential consumption which will enhance everyone’s well-being by reducing pollution. A study from the SA showed that in 1980, 50% of the production was a waste. For India, in 2006, 25% was a waste.
So, for COP to make progress, the agenda of both the rich nations and the ruling classes of the developing countries has to be cutting wasteful consumption.
Arun Kumar is the author of Understanding Black Economy and Black Money in India.

Growth and economic challenges | Arun Kumar [article in Hindi for Hindustan]

Growth and economic challenges / https://www.livehindustan.com/blog/story-hindustan-opinion-column-6-december-2023-9030422.html

Income Tax Data Reveals That Increase in Compliance Is Marginal | Arun Kumar

 (This article appeared in The Wire on Nov 27, 2023)

The income tax data released recently points to the highly skewed nature of income distribution in the country, with only about 0.68% people paying effective taxes.

Arun Kumar

 

The Central Board of Direct Taxes (CBDT) has released data on income tax payees for financial years 2013-14 to 2022-23. More detailed data about different categories of tax payees are available for the financial year 2020-21. This data can be used to get an idea of the income distribution of the top income earners in the country.

Few direct tax payers

Income tax is paid by a minuscule percent of the population. Official data shows that 7.4 crore individuals filed tax returns in FY2022-23 and 6.75 crore in FY2020-21. In this earlier year, there were also 2.1 crore people who did not file a tax return but paid Tax Deducted at Source (TDS). So, in FY2020-21, effectively there were 8.85 crore people in the tax net – which was 6.6% of the population. Since we do not have corresponding data on those not filing tax return but paying TDS for FY 2022-23, we do not yet know the total number of entities in the tax net in 2022-23.

Anyone paying income tax or filing a tax return has to have an income above the income tax exemption limit and therefore has to be among the top income earners in the country. What is their distribution?

The exemption limit for determining tax liability is now Rs 3 lakh but has been Rs 2.5 lakh, with some concessions for senior and super senior citizens. With a standard deduction of Rs 50,000 and rebate under Section 87A, till now an individual did not have to pay any tax up to a taxable income of Rs 5 lakh. Of India’s per capita annual income at current prices of Rs 1,50,007 in 2021-22, this is 333%. From the current financial year, tax will have to be paid at income of above Rs 7.5%, 414% of the likely per capita income of about Rs 1,81,000. So those in the tax net are in the tail of the income distribution.

With so much concession, for FY2020-21, out of 6.76 crore e-returns filed, 4.46 crore paid nil tax (67.3% of the total). The 2.1 crore who did not file a return but paid TDS must have had an income below Rs 2.5 lakh, otherwise they would have had to file a return. Adding these two numbers, effectively, 6.6 crore returns out of a total of 8.85 crore (73.4%) were filed by those with low incomes. 91 lakh (10.3% of those in the tax net) had taxable incomes above Rs 9.5 lakh and who can be called well-off in the Indian context. About 2.15 lakh declared income above Rs 1 crore and maybe characterised as wealthy.

In brief, people in top rung of the income ladder in the country were those who were in the income tax net (6.6% of the population) even if they did not pay income tax. Out of these, only 0.68% of the population were the really well off who effectively paid income tax. Further, 0.016% declared an income above Rs 1 crore and had a share of 38.6% of the taxable income.

Caveats

This picture of the well-off, characterised by those who effectively pay income tax, is incomplete. Two additional factors need to be taken into account. First, the rich families split up their incomes. This enables them to take advantage of concessions on each of the returns filed and each of the incomes may then fall in the lower income bracket on which a lower tax rate may apply. Second, the well-off resort to black income generation by not declaring their true income.

The first point implies that the 0.68% people who paid significant amounts of income tax belong to an even smaller percent of the families. So, the actual family income of the well-off is much higher. Since the poor face unemployment, under employment and joblessness, their family income is not much higher than what a poor individual earns. The implication is that the gap in family incomes between the well-off and the poor would turn out to be much larger than gap in incomes shown by the data on individuals paying tax.

Further, black incomes are generated by the well-off, who have substantial incomes. Those who have an income below the taxable limit don’t need to hide their income. They do not have to file a return or declare their income to the tax authorities. Those who have a taxable income of, say, up to Rs 9.5 lakh, need pay only a few percent of it as tax, if they take advantage of deductions under 80C, 80D, 80TTA, etc. So they will hardly benefit from hiding their income and will not be generators of black incomes.

It is the well-off, especially businessmen and professionals who declare a lower income to tax authorities so as to pay a smaller portion of their income as tax. Some of them completely escape the tax net by not filing a return or by showing an income below the taxable limit.

All these factors lead to the official data underestimating the skewedness of income distribution in the economy.

Has compliance increased

The organised sector has higher incomes and contributes most to direct taxes. It produces 55% of the GDP. Its share of GDP would have risen during the pandemic, which disproportionately hit the unorganised sector. The GDP was Rs 1,98,00,914 crore in FY 2020-21, the Covid year. So, Rs 1,08,90,000 crore should have been captured in the tax net from the organised sector. Some more should have come from the few well-off businesses in the unorganised sector.

Detailed data for FY 2020-21 shows that the taxable income declared by all return filers was Rs 69,59,552.48 crore. This is about 35.15% of the GDP and about 63.9% of what should have been shown as declared incomes by the organised sector. On this declared income, the tax collected was Rs 9,47,176 crore. The tax to GDP ratio was a very low 4.78%. If black income generation were taken into account, it would be even lower.

In FY2021-22, GDP recovered from its low during the pandemic, and became Rs 2,36,64,637 crore. The direct tax collection increased to Rs 14,12,422 crore, so that the direct tax to GDP ratio rose to 5.97%. In 2018-19, this figure was even higher at 6.02%. But, even this figure is low compared to many developing economies.

The government claims that more and more people are filing tax returns and presents this as an indication of better tax compliance and a reduction in the black economy. According to the data just released, the number of people paying direct taxes has risen from 7,42,49,558 in FY2016-17 to 9,37,76,869 in FY2021-22. This is impressive, but the catch is that most of the people entering the tax net declare nil income or a low income, as pointed out above.

A reduction in black income generation would have meant that many more of the individuals with high incomes would have come into the tax net, and the direct tax to GDP ratio should have risen sharply instead of hovering between 5.5% and 6% since 2014-15.

The increase in the number of tax returns is due to the constancy of the income at which a tax return needs to be filed remaining unchanged at Rs 2.5 lakh, while incomes have risen due to inflation. The per capita net national income, which tells us how much an average citizen is earning, is 30.1% higher in 2022-23 than it was in 2019-20.

Thus, someone with an income of Rs 2 lakh in FY2019-20, pre pandemic, would be earning Rs 2.6 lakh in FY2022-23. In 2019-20, she would not have had to file a tax return while in 2022-23 she would have to file a return. Thus, the number of tax return filers would automatically rise. But the tax they pay would not rise, so their entry into the tax net does not impact the tax to GDP ratio.

Conclusion

The income tax data released recently points to the highly skewed nature of income distribution in the country with only about 0.68% people paying effective taxes. The percentage of families they belong to would be even smaller. If tax manipulations by the wealthy and black income generation are taken into account, then the income distribution becomes even more skewed. Finally, the increase in the number of tax filers is due to inflation but this has hardly led to an increase in the direct tax to GDP ratio since most new entrants in the tax net file either nil return or are exempt from tax. So, tax compliance in the country has hardly changed.

Arun Kumar is the author of Understanding Black Economy and Black Money in India.

Critics are priceless and not unreasonable | Arun Kumar

 (Published earlier in The Leaflet, November 26, 2023)

A brief but powerful meditation on the politics of reasonableness and unreason.

IS it not reasonable to expect reasonableness in discourse?

A doctor friend set me thinking when she commented that such and such person is reasonable. In TV debates, after a critical comment, the anchor often asks the panelist, is there one thing that the policy maker has done right? In heated conversations, often it is said: be balanced— which is similar to saying be reasonable.

What does it mean to be reasonable? The dictionary meaning is ‘in accordance with reason’ or ‘moderate’. But aren’t these subjective categories? What is ‘in accordance’ with reason or ‘moderate’ is not agreed to by all in society.

Often, it depends on the individual’s situation in society or on society’s stage of development and the dominant discourse set by the ruling elite. Here, the focus is on the economic aspects but this analysis could also be extended to social and political aspects.

System’s idea of reasonableness

In a feudal society, the landlord holds the land and extracts rent from the farmers. Being reasonable might mean not being too exploitative lest it leave the farmers destitute.

Even if moderate, exploitation persists. In this system, any talk of eliminating landlords and giving land to the tillers would be considered unreasonable. But, with the advent of capitalism, (Adam) Smith and (David) Ricardo characterised landlords as wasteful and argued for ending their dominance. Were they being unreasonable? In the old framework, yes, but not in the evolving framework.

What does it mean to be reasonable? The dictionary meaning is ‘in accordance with reason’ or ‘moderate’. But aren’t these subjective categories? What is ‘in accordance’ with reason or ‘moderate’ is not agreed to by all in society.

Capitalism is even more wasteful than feudalism. Enormous waste is generated by consumerism deliberately promoted by advertisements and the example set by the corporate culture and government. The result is environmental damage, climate change and extreme weather events. But, would the ruling elite accept this as a reason to eliminate capitalism and go for, say, a Gandhian alternative? Undoubtedly much needs to be fleshed out about such an alternative, especially, given the technological changes that have occurred since M.K. Gandhi’s time.

Also read: How viable is Gandhi’s village today?

Talk of a Gandhian alternative to create a better world is considered unreasonable by the current ruling elite. They are already well off and not sure that in the new world their privileges will survive.

So, in their self-interest, they are status quoist and would characterise talk of alternatives as not only utopian but unreasonable. Clearly, reasonableness is associated with individual and class interest and not societal interest.

Gandhi in Hind Swaraj critiqued British parliamentary democracy. He argued that political parties work for narrow interests and not for society as a whole. He argued that leaders work for their self-interest and the PM for the narrow interest of his backers.

Further, the members of Parliament do not have the freedom to represent public interest since they have to follow the party whip. So, politics is all about exercising power to serve the interests of the financiers of the party. This is visible in post-Independence India where politics is controlled by black money and vested interests.

So, the current ruling dispensation would characterise Gandhi as unreasonable. But not openly. He was striking at their interests. He was asking people to reject the present set of rulers— not through violence since he believed in non-violence. He propagated change through making people conscious about who they should choose as their representatives. In today’s circumstances, this would even be termed as seditious.

Individual’s idea of reasonableness

The ruling elite identify with the existing system since that has given them privileges that they may lose in an alternative. Thus, they would term any major change as unreasonable and would work against it.

Since the elite set the public discourse, critics of the system are in a minority and overwhelmed by the dominant narrative. It requires courage for critics to stand against the tide since they have to pay a price for their defiance.

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

But workers in a capitalist system would not consider the critique to be reasonable? For workers, there is a daily struggle for survival while for the well-off, the goal would be to preserve and advance their gains.

Because of low wages, the elite can afford servants, drivers, gardeners and office peons. Life is comfortable. For the workers, a higher salary or wage is essential to improve the prospects of their family. This proposition is not unreasonable for workers but the elite would consider this as unreasonable. But the workers do not set the agenda of the public debate and get marginalised and so do the critics.

In a feudal society, the landlord holds the land and extracts rent from the farmers. Being reasonable might mean not being too exploitative lest it leave the farmers destitute.

In brief, the individual’s viewpoint on reasonableness depends on her situation in society. Some members of the elite may accept the need for an alternative but such critics of the establishment comprise a tiny minority and are branded as unreasonable by the ruling elite.

Critics of policy

Should not the policies that sustain rapacious capitalism and lead to growing inequalities be critiqued? Can this be termed as unreasonable? In public debates, the critics are often asked, is there not something right that is being done by a policy?

A trick question that sidesteps the important time dimension. Namely, over what time frame is the policy under discussion being analysed? While in the short-run, a policy may appear to be necessary, but over the long-run, they may lead to growing problems, like environmental decline and growing inequality.

The role of policy is to make things better. Even if the government does not do much, the economy has its own momentum. Technology is changing and new and better products become available.

Automatically, there will be transition from typewriters to word processing and landlines to mobile phones. The role of policy should be to optimise change, enhance people’s welfare and resolve society’s problems.

By definition, governments justify their actions. Using selective data, they present their policies in a positive light and downplay the negatives. A phalanx of media, politicians and favoured experts rise to reinforce the government’s views. The government spends enormous resources to create a climate of acceptability in society.

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In contrast, critics who point to alternative facts or faulty official methodology and hold a mirror to the policy makers are branded as unreasonable.

Since the elite set the public discourse, critics of the system are in a minority and overwhelmed by the dominant narrative. It requires courage for critics to stand against the tide since they have to pay a price for their defiance.

What is needed is data-based critique of policy pointing to its long term consequences for society. This has to be theoretical since it is about the future for which data has not been generated yet. Only projections from the past are possible.

Hence, one is talking of a hypothetical change. A critique then helps devise better policies or prevent society from going astray. After all, many ‘solutions’ proposed by policy makers from which some sections gain materially have turned out to be ‘non-solutions’ leading to growing social problems.

Consider the completely misconceived policies of demonetisation and Goods and Sales Tax (GST). The problems these policies have led to in the long-term were ignored for short-run considerations. In the short-run they seemed to be rational and reasonable to the ruling elite but critics pointed to the problems that will follow in the long-run. Were they unreasonable?

Conclusion

In brief, calling something unreasonable is relative to one’s position in the system and is often determined by the self-interest of the ruling elites. In spite of all the ‘social progress’ since Gandhi’s times, we now recall what Gandhi cautioned us about and the alternative he proposed is becoming more relevant.

Society needs critics who look at the long-term perspective since they point to the pitfalls and the correctives required. There are perks for being with the system so it is costly. But critics come for free— they are priceless.

Society needs critics who look at the long-term perspective since they point to the pitfalls and the correctives required. There are perks for being with the system so it is costly. But critics come for free— they are priceless.

Arun Kumar

Arun Kumar is a Retired Professor of Economics at the Jawaharlal Nehru University. He is the author of `Demonetization and Black Economy’ (2018, Penguin Random House). He blogs at http://arunkumarjnu.blogspot.com/