Those who resist technological progress (or, progress, in general) are called Luddites. But, Luddites were not protesting technological progress as much as the distribution of the fruits of the profits derived from the deployment of machines. Sounds familiar. Read this interview. In fact, ‘Luddites’ derived their name from a mythical character called Ned Ludd. The reference for that article and many other articles are there in the article I co-wrote with my colleague Raghuraman on ‘Machines and Men’. I enjoyed writing this one. Our first article in this series of two articles is here.
The June 2019 Monthly Bulletin of RBI has an article on the accuracy of monsoon forecasts by India’s Meterological Department and Skymet, a private forecaster. The conclusion of the paper is sobering:
There is no significant correlation between the projected rainfall (IMD and Skymet) and actual rainfall in India. While none of the forecasts are close to the actual, the performance of the IMD’s SSLRF is better than FSLRF and Skymet. Both IMD and Skymet have failed to predict drought and excess rainfall in most of the cases. Nevertheless, the SSLRF nailed down the 2015 drought and its probability of predicting near-normal monsoon has been reasonable and higher than FSLRF and Skymet. In contrast, the predictive power of the international agencies, viz., BOM and NOAA in forecasting extreme rainfall (which generally coincides with the El Nino and La Nina conditions) is much better than that of the IMD. The comparative assessment of all forecasts suggests that for generating macroeconomic forecasts, the use of IMD’s SSLRF and the predictions of international agencies like NOAA and BOM in conjunction may be appropriate as the preliminary forecasts of IMD (FSLRF) and Skymet released in April appear to be noisy. [Link]
Whoever chose this header for the story – whether the journalist herself or her Editor – he or she deserves praise for doing so. The header of the article is “RBI’s 12 February circular makes a comeback with a dash of humility”. Nice.
All institutions need to go through the cycle of competence – confidence – overconfidence-overreach-setback-humility. Probably, RBI had to have its moment. Its circular of 18th February 2018 was an over-reach. I went through the circular (‘Prudential framework for resolution of stressed assets’, June 7, 2019) It does not relax the credit discipline and yet it provides time for resolution before the non-performing debt goes before the bankruptcy court.
The Federal Reserve will announce its interest rate decision tomorrow (Wednesday). Financial markets expect a rate cut of 25 basis points or even 50 basis points. But, William Dunkelberg, Chief Economist at the National Federation of Independent Businesses, beautifully and in very simple language establishes that the real economy does not need interest rate cuts. If anything, credit availability, cost of loans, unmet credit needs are all at near five-decade lows. Read the whole thing here. It is worth it.
It is clear that the Federal Reserve under Jay Powell has really flattered to deceive in respect of decoupling monetary policy from asset prices. Now, it is fully captured, it appears. One still entertains a faint hope that the Federal Reserve Open Market Committee will surprise us pleasantly with some spine.
In a sense, William Dunkelberg’s article really is a succinct capture of all that is wrong with ‘The Rise of Finance’ that Gulzar Natarajan and I had documented.
Read this in John Authers’ missive:
On the yuan, I found this point from Michael Howell of CrossBorder Capital very interesting:
The China currency is getting traction and could displace the USD in Asia (China’s stated aim). What is not well understood is that China still has an immature financial system which forces it to accumulate USD (from trade which is USD denominated) and manage them centrally via the State. Domestic institutions, unlike in the West, have predominantly Yuan liabilities and so cannot afford to take this forex risk. China initially used forex reserves to buy US Treasuries, but now invests via FDI, e.g. Belt and Road. This external infrastructure programme will help to establish the wider use of the Yuan across Asia and get China off the US dollar hook. Do not underestimate the value of this seigniorage for growth.
He could even back it up with an anecdote:
I attended the LSE launch of George’s book. There I met an ex-Central Bank Governor from Central Asia who shared my scepticism about George’s Yuan point. “I will show you,” she said and pulling out her iPhone she shared a photo of her at a formal signing ceremony for a several billion Yuan swap line with the Chinese Finance Minister. Proof she claimed that this underlying use of the Yuan is already the reality across Asia. [Link]
Let me now do what my good friend Amol Agrawal of ‘Mostly Economics’ usually does.
Had a good chat for half an hour with a good friend. He drew my attention to the remarks by Pronab Sen, former Chief Statistician of India. Pronab Sen had said that Arvind Subramanian’s estimate of annual average 4.5% GDP growth was based on volume indicators and the ‘unexplained’ 2% to 2.5% growth could be due to productivity, quality, etc. Or, it could be an error, of course. That would be a fairer statement to make than to call it an overestimation categorically.
You can read the article in ‘Business Standard’ that carries the comments by Pronab Sen.
These further comments by Pronab Sen are interesting:
“The paper’s finding means that there has been an equivalent improvement in productivity,” he told Business Standard. “But this would also mean that the older series underestimated growth in the years prior to 2011-12,” he added, since it was more robustly based on volume indicators.
That is the problem. The debate over India’s GDP growth calculation would have remained apolitical and technical but for the latest revisions in the last six months that bumped up growth estimates for 201-17 and for 2017-18 and lowered the growth estimates for the period from 2004-05 to 2011-12 in a ‘backcasting’ exercise.
Those changes – which defied logic and did not conform to anecdotal evidence – have what pushed the debate into the political arena.
That is why it is all the more important to take the debate back to the technical realm.
There are two people whose timing has been questioned recently. No, this is not about timing of cricket strokes by the batsmen – the timing of the impact of ball on bat. If it is perfect, there is no need to apply force. The ball speeds to the boundary. But, this is about the timing of their announcements.
Yuvraj Singh announced his retirement from cricket even as a World Cup cricket campaign was on. Sharda Ugra who had helped him write his story gently hinted that legitimate questions could be asked of his timing. One can say that he wanted a fraction of the attention on himself. Let us leave it there.
Our interest in this blog post is on someone else.
The other person whose timing has been questioned is that of the former Chief Economic Advisor, Arvind Subramanian. Earlier this week, he wrote an article in Indian Express summarising his findings on the econometric work he had done on India’s GDP growth estimates. His results suggest that, on average, India’s GDP could have been overstated by a magnitude of about 2.5% points every year since 2011 amounting to a cumulative 19-21% during the whole period: 2011-18. However, for estimation, he excludes data for 2017-18 and 2018-19.
He has been criticised by commentators on both sides of the political divide in India. Those who are opposed to BJP and Modi criticise him because he did not publicise this before the election. It might have strengthened their hands. Or, so they think. Unlikely. But, that is their grievance.
The pro-BJP and pro-Modi commentators are upset that this paper has spoilt the ‘feel-good’ air that they are basking in, post-election victory. There is also the unstated anger that AS’ results suggest that the over-estimation of GDP growth, if broken down on an annual basis, is more in the post-2014 years than in the pre-2014 years (up to 2011) because official growth estimates between 2011 and 2014 are lower than the annual growth estimates post-2014.
Since both camps are unhappy, he must have done something right.
In fact, one must applaud his timing. By releasing his study after the elections were over in India, he had shown himself to be apolitical. The only politically somewhat loaded statement he has made in the paper is this: “that also requires us to reject the more recent estimates for the post-2011 period because they may not simply reflect the technical changes.”
The statement put out by the Prime Minister’s Council of Economic Advisors does not indicate an awareness of the spirit and the discussion that are needed. In the interests of the credibility of the government and that of the Indian Statistical System, the data and the methodology need to be put in the public domain, instead of hiding behind technical arguments.
The other charge that is laid at AS’ door is that he didn’t he do this when he was in CEA. Now, we don’t know, honestly, if he did not do this exercise inside the government. He might have given the output to them and it might have been rejected. That could be one reason why he left six months earlier than he needed to. Who knows?
But, let us accept his statement that he did not have the time and space to do so when he was the CEA. I assume that by ‘space’ he means ‘mental space’ and nothing else.
To a large extent, I can vouch for that, even in my limited experience of being the Dean of a Business School. One simply does not have the energy at the end of a long day to write serious blog posts. It is hard to catch up even with one’s reading let alone writing. My blog posts came down drastically since October 2018 – when I took up my assignment – for no other reason but that I did not have the time and energy to be as productive as before.
If some were to attribute it to political correctness, I can point out that even my private emails to my mailing lists came down dramatically let alone public blog posts.
So, I am prepared to take him at his face value that he did not have the time and space to engage in a serious data analysis and investigation. It is one thing to write casual op.-eds., and it is another thing to undertake a serious investigation of data and do some statistical analysis on them. After all, the Chief Economic Advisor was engaged in multiple other projects – planning for the introduction of the Goods and Services Tax, annual Economic Surveys, etc.
I have gone through Arvind’s paper carefully more than once. His conclusions appear reasonable. He has merely invoked the spirit of ‘difference in difference’ approach. The estimation method is simple statistical regression. Did the difference in methodology adopted since 2011 make a difference only to India? That is ‘two differences’ there.
His first two pictures – Figures 1 and 2 – are specific to India. They do no invoke cross-country analysis. In other words, he has not just engaged in an ‘unusual exercise’ of cross-country regressions. He has also analysed India independently.
I had done a similar exercise in 2016 itself. See here and here. These two papers show that the GDP growth figures do not accord with growth in many other indicators of the real economy. The analysis was done using several indicators and the conclusions were clear. I did not undertake an econometric investigation. So, my result was not quantifiable. It was descriptive in nature. I concluded – without any statistical estimation – that India’s real GDP growth rate – might be overstated by 1.0% to 1.5%. In other words, the new GDP growth data did not pass the smell test. They still do not.
Arvind’s points about import and export growth and GDP growth in the post-2011 period and the import elasticity of demand are as important as his point about growth in manufacturing not being correlated with growth in manufacturing exports.
One could ignore his cross-country and panel regressions and undertake a ‘India-only’ exercise but there is not simply enough data, if one used annual data and tried to estimate a structural break in the data either by splitting samples or by introducing dummy variables. But, the evidence is clear in his Figures 1 and 2 and in my works cited above. There is no point in being in denial about it.
Pre-2008, India experienced an economic growth boom due to massive capital inflows, credit growth, capital investment boom and export growth. Many other nations did so too. Post-2008, global trade volumes have slumped. Countries – developing and developed – briefly recaptured their growth rates of pre-2008 years due to stimulus. Some of the stimulus was unsustainable as India found out in 2013.
That is why most of the countries have struggled with economic growth since then. In fact, post-2014, leading emerging economies have suffered lower growth than pre-2014. Only India has been an exception in spite of the introduction of many potentially growth-unfriendly and demand-unfriendly structural but long-term positive and essential structural reforms. Does not pass the smell test.
Harsh Gupta has written an interesting and thoughtful op.-ed., in Indian Express drawing attention to the fact that India’s tax collections have grown robustly since 2014 and if Arvind’s growth estimates (mid-point of 4.5% between the range of 3.5% to 5.5%) were accepted, the tax/GDP ratio would be much higher. He is right unless the tax data were fudged too. Rather unlikely. Tax collections are realised in cash and the government has to transfer a portion of it to States too.
My responses to Harsh Gupta’s article are as follows and not just to his argument on Tax/GDP ratio:
(1) The tax collection could well be the problem. That the tax collection mechanism became so active and coercive might be one of the contributors to the private sector uncertainty and investment funk. Indeed, even many sympathisers of the BJP and the Modi-led government were of the view that ‘tax terrorism’ was pursued with greater vigour post-2014 than it was in the pre-2014 years.
(2) For example, between 2014 and 2016, when the price of crude oil slumped, the Government did not pass on the decline in the price of crude oil to the Indian public. Instead, it loaded up additional taxes on the crude oil and ensured that the final retail price of petroleum products was only marginally lower, if at all.
(3) Productivity improvements would show up in profitability data. They have not. Second, export growth would be better if there is a renaissance of productivity. That is why despite the slump in global trade volumes, countries like Bangladesh and Vietnam have done better than India with export growth.
Some friends have pointed to articles such as this and have asked rhetorically if these improvements are captured in GDP data. Two responses are in order:
(1) They should be captured in profitability data, eventually.
(2) Ceteris is not paribus:
(i) Even as GST related improvements are happening to the movement of goods in India, the power sector (Independent Power Producers) has gotten into trouble due to lack of raw materials availability and at the expected prices and due to low price realisation from buyers or non-evacuation of power at agreed prices.
(ii) Then, the non-banking financial sector has gotten into trouble and has stopped lending.
(iii) What has grown rapidly even amidst overall tepid bank credit growth is growth in credit to households including credit card or revolving credit. That is for consumption purposes. That is not the stuff of productivity improvement.
Only if other things remained equal and then GST-triggered productivity gains occurred at the margin, one can speculate on their positive impact on growth.
In the final analysis, it is important to note two things from Arvind’s analysis (and mine):
(i) Post-2008, emerging economies are not the same. It is futile to keep talking about the 2008 crisis as the North-American or the Atlantic crisis. Emerging economies – including India – are as, if not more, worse off as developed nations are. It is not just about India and about economic growth in the UPA or NDA years.
There is a need to rethink the facile conclusions about the momentum of economic activity and the balance of economic power shifting inexorably towards the East and prepare accordingly to negotiate and deal with the West.
Such realism is also necessary to tackle the impact of Artificial Intelligence and Robotics on employment, the challenges of climate change and the looming water scarcity. All of these threaten both economic growth and economic and social stability.
(ii) This cannot be viewed as a partisan political battle. There is much at stake. Instead of arguing about it, it is far easier and more effective (lasting effect) to make available the CSO data and methodology to independent statisticians for verification. Only then will the controversy end.
(iii) It is quite possible that some concerns were raised in the government by some about growth numbers. But, that they were not either heeded or smothered. That should not be the case. The lone dissenting or a different voice deserves all the respect, if not more, as the conforming voices.
The government could have easily asked the CEA or the Department of Economic Affairs to come out with such an exercise as soon as the controversy about GDP growth estimates erupted in 2015. That would have made both monetary and fiscal policies more responsive and reasonable in the last four years. The failure to accept a lower growth rate has actually prolonged the growth stagnation and even resulted in the previous government taking a chance with demonetisation, perhaps at the wrong time.
In short, Arvind Subramanian has done a rather useful service to the discourse on India’s official economic data. It is better to pay heed to the message even if its specifics are open to challenge. It is wrong, self-destructive and counterproductive to shoot the messenger.