NEW DELHI—The Narendra Modi-led government has announced piecemeal measures to address the ongoing economic slowdown from the supply side, i.e. businesses, while the “real problem” is from the demand side, namely consumers. Thus, it is not clear if the government understands the problem or how to deal with it, said Distinguished Fellow Sudipto Mundle of the non-profit think National Council of Applied Economic Research (NCAER).
Mundle spoke with HuffPost India days after the NCAER released its mid-year review of India’s growth prospects, in which the well regarded think-tank estimated that the economy will grow at just 4.9% in the financial year 2019-20. Prof. Mundle led the team that worked on the forecast and the mid-year review of the NCAER.
When asked what he makes of Professor Arun Kumar’s controversial assessment that the Indian economy is presently under a recession, the former chairman of the National Statistical Commission disagreed. Unorganised sector, a key factor in Professor Kumar’s estimation, contributes a much smaller share to India’s Gross Domestic Product compared to workforce because, “productivity is much lower” in the sector, he said.
In this interview, the former member of the fourteenth finance commission also said that the key takeaway from this forecast is that, “we are bottoming out; not that we are climbing back up, but the decline is sort of flattening out and we are at some kind of cusp.”
Edited excerpts from an interview —
The NCAER’s 4.9% GDP growth estimate for 2019-20 made it to the headlines recently for being the lowest among all forecasts that have come out in the past fortnight. Could you explain how you arrived at this number and why?
You see, this figure is not something we just pull out of our hats, or is just our guess. It is driven by a model which is based on leading indicators. Some indicators come early, some come out late and as you get closer to a particular date, which is the date for your forecast, you get more and more indicators. So that is how we do this.
We have actually two separate models, because the quarterly is based on what we call high frequency indicators which come out every month. Or every quarter. The annual forecast is based on annual set of data, which comes out of with annual frequency. So that is the basis of our forecast. It’s not that we are just giving our judgement. It’s driven by the model.
So in this model, what kind of factors did you consider while forecasting this figure? For our readers, what is it that they will learn new from your forecast about the factors that you have considered while forecasting that the economy will be growing at this rate?
It factors in a whole lot of different indicators of industrial production, of different indicators about agriculture production, of the flow of credit in the economy and so on. There are a number of them. And some of these are available on an annual basis which we use for the annual model, some are available on a more frequent basis so they are used for our quarterly forecast.
The interesting thing is that our quarterly forecast for Q2, which is the second quarter of the year, is the same as the forecast that turns up for the annual. What it means is that probably in the third and fourth quarters, things are not going to be any worse or much worse than what we have already seen in Q2. I think the model is saying that that means we are bottoming out; not that we are climbing back up, but the decline is sort of flattening out and we are at some kind of a cusp.
Now, these are models. Models and forecasts have their error margins and so on so one should not take them as gospel truth but this is our best guess or best expectation that this is the path we are on.
You said growth is ”bottoming out”, but there are indications by some experts that we could go lower as well. In fact, in one of the recent interviews I did with Professor Arun Kumar he claimed we are in a negative growth period already if data for unorganised sector was factored in. His claim is that we are already in a recession. How do you respond to this assessment?
I would not want to, you know, judge or second guess Dr Arun Kumar because he is not present at this interview so it’s not fair to him. But let me just say that, in principle, I think he has a very important point that in the Indian economy the unorganised sector is very large and certainly much more distressed than the organised sector so, if you have a more granular picture broken down into many parts, it certainly gives you more information about what’s going on and our indicators for unorganised sectors are indeed very weak. So that, in principle, I think that comment is right.
But that being said, how much it matters, how much it affects the growth rate and so on, is a different thing because the unorganised sector accounts for a very large share of our workforce but a much smaller share of our GDP compared to the workforce because, you know, productivity is much lower in that sector. So you can understand logically that if it, say, accounts for 50% of the workforce it would account for something much lower than that. If its production is half, it would account for 25% of the workforce and so on.
So that’s why the impact on employment that you see from the unorganised sector, may not translate to an equally important or strong impact on output. So there are different sides of the argument which is why I don’t want to comment on what he has said; that’s his view.
Recently, Dr Manmohan Singh wrote the “citizenry’s distrust in institutions and lack of confidence in the government” as core factors for the ongoing economic slowdown. This seems to be quite a different take from what we usually hear as factors for the slowdown. What’s your sense?
Again, let me say that Manmohan Singh was my professor and I hold him in very high regard. He is certainly one of the most experienced persons in the country. But we also have to recognise that today he is wearing a different hat. He is wearing a political hat representing the Congress party, which is in the opposition and he has to play that role also.
As far as the substance of what he is saying, I certainly think that there’s been some erosion of public confidence in our institutions and in particular in this matter, you know the way statistical commission has been holding back reports which give negative picture on GDP and employment, that I don’t think has a good effect, in fact I think that is hurting the government’s credibility.
The other aspect is policy uncertainty, you don’t know what is happening. There is a lack of confidence. I think the people in charge are not on top of the problem. It took a long time to even admit that there was a serious problem. Now everybody admits it. But having done that, it’s not clear that they know what the source of the problem is or how to deal with it. There have been piecemeal measures from what we call supply side intervention. Whereas the real problem is from the demand side.
It took a long time to even admit that there was a serious problem. Now everybody admits it. But having done that, it’s not clear that they know what the source of the problem is or how to deal with it.
Since we are segueing into that, let me just ask this question. It is about the corporate tax cut and subsequent measures like the real estate sector related measures which have been announced. Will they help stimulate demand?
You see, this is the issue. You reduce corporate tax rates, maybe it is a good move from a long term perspective but what is its immediate impact? Just think about it. Corporates are paying less taxes, their bottom line is going to improve, what are they going to do? Are they going to take that money and put it into investment right away? No. They are first, if they are a high leverage company, they are going to deleverage, then reduce their debt exposure, then they are going to distribute some of it as profits, again part of that will go into savings. So some small fraction of it will actually come back as additional consumer demand.
More or less the same thing on the real estate sector. These are all enterprises, if you will, on the producing or supply side of the economy. The problem is on the demand side. People don’t have money to spend. You need to put money in their hands and lots of suggestions have been made about what needs to be done. In fact, the government has already in place a number of programs. You can have better programs. Even the one that you have, just beef them up, put more money through them. Whether it’s the MGNREGA program or the Prime Minister’s PM Kisan program. Or very importantly, I would say, the Pradhan Mantri Gram Sadak Yojana; the rural roads program which now for more than 20 years has been an excellent, very successful infrastructure program and it is very labour intensive. It puts money in the hands of poor people. Workers in rural areas. So there is a whole slew of things which need to be done.
I am not saying this for some pink or left oriented goody goody things, it is a practical thing. It is a very hard nosed practical measure that you need to put money into the hands of poor people because of their high propensity to consume. It quickly churns up the income multiplier in the systems.
In principle, the point is how do you get money into the hands of poor people? Because they have a high propensity to consume. Whatever they earn they immediately spend. It churns up the income multiplier in the economy. I am not saying this for some pink or left oriented goody goody things, it is a practical thing. It is a very hard nosed practical measure that you need to put money into the hands of poor people because of their high propensity to consume. It quickly churns up the income multiplier in the systems. That’s the analytical point.
Now for the details of how you do it, I have mentioned a number of programmes. You could think of others. Point is, I don’t think we should wait for starting new programmes. Quickly get money out the door from existing programmes. Now, in that there is a huge challenge because the government doesn’t have money.
But the government says there isn’t enough fiscal space for increasing expenditure on these things. And we are also witnessing a shortfall in Goods and Services Tax collection. So how does one balance out these things?
I was coming to that. This idea that fiscal space is not there is a myth. It is for ensuring that there’s business as usual, that if you don’t want to do anything, don’t take any strong measures, of course there is no fiscal space. But if you look at this measure we just talked about, reducing corporate tax rates, as I said, in the long term it may have a good effect but in the short term it is going to further reduce your revenue. Isn’t it? The government itself has put out an estimate, in my view overestimate, about how much revenue it is going to lose.
The point is this is actually the wrong time to do this. We are already running short of revenue; we are actually running far short of the budget projection which talked of 19-20% increase in tax revenue and we are running at less than 10% tax revenue. And you want to reduce and complicate further. The timing is very bad. Though it might be a good move from the long term reform point of view.
Now, what can they do? 5% of GDP is locked up in the form of concessions and exemptions being given under direct tax, indirect taxes, corporate tax, income tax, customs duties, central excise etc etc. All is there in the receipt budget of the government. Now it needs to take a hard call. Whatever the reasons, these are the special interests that are being taken care of. This is not the time. We need to take a hard measure on this and the present leadership is not lacking in boldness or taking hard decisions as you and I know, so they can clampdown on all these exemptions.
Also there is about one and a half percentage of GDP, this is a report of the Comptroller General of Accounts, which is locked up because money is just lying there and budgets are not being spent. People who ought to be paid are not being paid. So you know, government departments have to push the door out. The finance minister mentioned this. I don’t know whether this is going to have any effect. So that’s another one and a half percent of GDP. Then there are a lot of unwarranted subsidies. I am not talking of subsidies on food, education, health or drinking water. These are good things. But there are other subsidies for what we call non-merit goods which don’t have any reasons to be there. Again serving some special interests. Clampdown on those. So take some hard measures which may hurt some special interests but this is the time you have to do it, we are really in a crisis mode.
And instead of only listening to the specialists, doing whatever they are encouraging you to do, you need to think independently, that look we need to pump up demand. We need to put more money in the hands of poor people. But we cannot afford to increase the deficit. Because the borrowing limit of the government is already very large. And its crowding out private borrowers and potential investors from the financial markets. So really increasing deficit is not an option. You can’t increase it much, maybe a little bit is ok. So you really need to do something on the revenue front which is where the big shortfall is. Without that you will have to compress expenditure instead of increasing expenditure. You get my point?
Yes. And, just to be sure, you are saying that none of the measures which have been announced thus far really go into these areas you are talking about.
Yes, I am afraid so. All of them are measures on the supply side which give relief to producers, entrepreneurs, corporate houses, real estate and so on. But right now that’s not going to help you pump up demand. You need to put money in the hands of consumers. And mostly poor consumers who immediately spend what they get. And that’s what acts as a multiplier. So that’s my view.
What do you make of the impact of the union government’s decisions to withhold its own reports about jobs and consumption data because the numbers showed its record in a bad light?
Information that is inconvenient and gets suppressed, that affects the credibility of the government. People are not so naive. This is a very crude way of trying to tell you the bad news. Try to face the bad news and admit that, “look we got a problem but we are trying to deal with it”. That’s the symptom of a confident government. Suppressing the bad news doesn’t help.
Now, that being said, the Periodic Labour Force Survey is supposed to come out every quarter for the urban areas. Which includes the industrial sector. And once a year for the rural sector. I have not seen anymore releases of the quarterly data for the urban areas. Hopefully the annual one will come. But given what we know what’s going on in terms of the economy, nobody in their right mind would expect the employment situation to improve, if anything it may have got worse.
Now, coming to the consumption thing. You find that consumption has gone down, therefore you don’t like it. Somebody may find it unbelievable, so you suppress the data. Put it out. You are not the experts. Government civil servants and babus are not experts to exercise their judgements. They may sit in high positions but ultimately they are babus. Put it out, let the experts examine this information and, if I may say so in passing, don’t mind my saying so, even journalists are not experts. So many journalists opined that this figure is all wrong and rubbish and so on, it’s based on very half baked information. Let the people who understand statistics and data and so on take a call, whether there is a problem or not a problem on these data. So we’ve been saying, many of us, please set up a statistical audit system to look at all the data that is being put out by the National Sample Survey Organisation, Central Statistical Organisation, National Accounts and whatever else to give unbiased assessments on whether there is a problem or not.