Capital formation or garbage data generation?
On the day the Reserve Bank of India (RBI) pulled off a Houdini act by revising its forecast for India’s economic growth up and inflation forecast down and getting the bond market to rally, it had also released its surveys on inflation expectations, consumer confidence, industrial outlook, capacity utilization and order book, etc. There is a wealth of information in these but they do not usually get the attention they deserve, either from the pundits or the policymakers. Take the Consumer Confidence Survey. The survey is conducted in six major cities and covers more than 5,000 households. The message it has does not bode well for the ruling party. Although households respond on many issues, I have taken up just two of them for elaboration here—their response on the overall economic situation and on the employment situation. On both, they share their assessment of current conditions and prospects.
The economic situation assessment is -8.2. That is, the percentage (of those surveyed) that says that the economic situation has deteriorated exceeds the percentage that says that the economic situation has improved by 8 percentage points. In November, this was -18.9. Households feel that their economic situation is fragile. In 2013-14, for about six quarters until mid-2014, the reading was -23.3. We can draw our own conclusions as to how similar (or dissimilar) households’ assessment of their economic situation now is compared to that gloomy period. Was that one of the many reasons for the comprehensive defeat of the United Progressive Alliance (UPA) government? If so, it is a warning for the present government.
In 2013, they had also become pessimistic about the prospect of their economic situation improving. But, in 2014, they perked up substantially about the future. Until end-2016, they had remained very optimistic about the prospect of the economic situation improving. The average reading for the period (2014-16) on their expectation for economic condition was 36.6. In the most recent survey for the quarter ended 31 March, this figure was 20.7. Households perceive the outlook to be cloudy.
The message from their assessment of employment conditions is not encouraging either. In fact, it is worse than how they felt about their “current” employment prospects even in 2012-13. Even with respect to their future employment prospects, except in the survey released in September 2013, households had better expectations than they have now. Their hopes were raised when the new government came to office in 2014 but since then, it has been yo-yoing around moderate levels. Clearly, not all is well in the household sector and that is clearly the reason behind the decline in household savings rates and capital formation rates. But it should have reflected in economic growth rates. It has not and that is a puzzle.
The puzzle is because capital formation by non-financial private sector corporations as a percentage of gross domestic product (GDP) has remained stable since 2011-12. That is not at all consistent with the year-wise capital expenditure proposals by the private sector tracked by the RBI and reported annually in its September monthly bulletin. The data presented by RBI shows a dramatic decline in capital expenditure proposed to be incurred since reaching a peak in 2011. Indeed, the decline had accelerated since 2014. Hence, to show that the private non-financial corporate sector capital formation/GDP ratio remained stable between 11% and 12% between 2011-12 and 2016-17 is to stretch things too far. Clearly, the “Achilles heel” of India’s national income data, since the change in the base year to 2011-12, is the data on capital formation and savings in the non-financial corporate sector.
Consequently, economic growth rates under the new 2011-12 series, starting from 2012-13, are suspect. They are mostly overstated. The truth is that India has not recovered at all from the collapse of the (mal) investment boom of the new millennium in 2008. It appeared to recover, thanks to the disproportionately large stimulus response in 2009. So, the economy experienced a fleeting recovery in 2009-10 and in 2010-11. But, after that, it has been steadily downhill. That is what RBI survey data and its data on the phasing of capital expenditure tell us. Further, growth in domestically-oriented indirect tax collections, such as excise duty and service tax, from 2009 onwards conveys a picture of unsteady and unflattering economic growth in the country.
We have to be blunt here. Capital formation data from the Central Statistics Office (CSO) is mostly useless. One has to simply glance at Tables 3.1 and 3.2 of the “First Revised Estimates of National Income, Consumption Expenditure, Savings and Capital Formation” for 2016-17 to know immediately that the data has absolutely no logic. Capital formation in different sectors spikes and crashes from one year to the other for no apparent reason.
In short, the Union government has been badly let down by Indian macroeconomic data managers. It is quite possible that it would not have engaged in its audacious policy experiments had it been informed that economic growth is not what it is reported to be. So how can you revive “real” economic growth?
For starters, the government can relax the stranglehold that the tax department has on taxpayers. Second, it can learn from the policy proposals of a Marxist-leftist finance minister. More on that next week.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk
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