The fracas over GDP back series data

The presentation of the back series numbers on GDP has quite expectedly created a political storm with protagonists, apologists and critics from all sides joining the animated debate. It is now clear that the numbers put out have not been accepted by the CSO and there can be other variants coming out in course of time. Two things need to be put in perspective here. First, what exactly is this back series about? And, second, do governments bring about GDP growth or do they only facilitate the same?

On the first issue it should be understood that when the base year changes from 2004-05 to 2011-12, the goods and services included in the basket is changed making it more representative. Outdated products move out and new ones are included in the series.

A challenging task

Now, to get information when creating a back series is challenging as several imputations and statistical proxies are used, especially if information did not exist before. Combining various techniques, the back series is created. Now the one which has been put up shows that the period coinciding with UPA-1 has a higher average growth rate compared with the NDA-1 regime. As it has taken a political turn, there is a verbal game being played to show which government did better.

This is where we need to ask the question as to what exactly is the contribution of the central government to GDP growth. To begin with, we have a federal structure where there is a central government, state governments, urban local bodies and panchayats. All of them provide the systems in which economic agents operate.

While there has been a tendency to relate growth with the central government, the other entities are forgotten even though they are more critical when, say, a company operates. The World Bank ‘Doing Business’ rank is good at the Centre, but for a company in Tamil Nadu the permission required for construction or electricity is dependent on State laws and is not affected by the Centre.

Second, if one looks at the actual contribution to the GDP for the government, it would be linked with the size of the budget. A larger size gets a better GDP value-added number in the component of ‘public administration, defence and other services’.

This will also include all the other components of non-development expenditure which economists frown at. Higher subsidies reduce GDP growth while higher tax collections act as a prop. Interestingly, the capex, which is echoed by economists, is of the magnitude of around ₹3-lakh crore (including defence of around ₹0.8-lakh crore) which is a very small part of the overall GDP of around ₹170-lakh crore.

Third, the critical role played by the government is in providing a policy framework for the operators. This is where one can compare initiatives taken by various governments and it is here that the NDA record is impeccable.

There have been a slew of reforms introduced in the areas of power (UDAY), telecom auctions, mining allocations, GST, FDI, doing business, and budget management, among others. Governments can provide the right field to play on, but the onus is on the non-government players to deliver.

Fourth, if one looks at the components of GDP, then this argument becomes clear. Agriculture output is driven by the farmers and monsoon and while government supports through procurement, MSP, marketing (eNAM), there is no direct role here. GVA from mining and manufacturing is based on the P&L accounts of companies in the field, where again there is no direct government involvement.

Power is in a joint effort of private sector with the State electricity boards and Central PSUs — but not the government. The contribution of the construction sector is based on cement and steel, which is in the ambit of the corporate sector. GVA from trade is based on GST data, transport on data from various modes of transport, hotels from P&L accounts, and communication from telecom companies.

The P&L again drives real estate which has a share of 72 per cent in the group of financial services, real estate and professional services while banking business determines the GVA on the financial side. The last component of GVA, which is public administration and other services, is based on Union government expenditure. Curiously, as governments get badgered for more spending, this component is probably the ‘most real contribution’ to GDP growth.

Putting all these arguments together, it does appear that while the rhetoric around which government did better serves the purpose of occupying media space, the GDP numbers per se do not really tell us the story. It is the structures and systems that have to be compared and often the results flow over a period of time.

The construction of a metro line, for example, provides benefits over a longer period of time than the initial expenditure incurred, which cannot be captured in the GDP numbers.

It is fairly naïve to relate GDP growth with governments in the statistical sense. This is a fallacy which is also witnessed when one associates regimes with current account deficits, which is actually driven by oil prices most of the time. As an extension, governments cannot really take credit for a stronger rupee which is an outcome of the balance of payments situation. Inflation too is almost always on the agricultural front where governments can never really go against the tide in case of crop failure.

Growth enablers

In an economy which is run on the basis of markets, governments become enablers of growth while addressing social issues that are outside the purview of the private sector. An effective government provides the right playing field but the players determine which way growth will move.

Direct intervention through specific spending helps to bring discipline at times to keep the economy on track. Further, deep reforms like say GST will have significant benefits flowing with a time lag and to attribute say, hypothetically, higher collections or more taxpayers to the future regime (if different) at a later date would be erroneous when the effort has been put in by the present regime.

The writer is Chief Economist, CARE Ratings. The views are personal.

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