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The recent GDP data of CSO (Central Statistical Office) have caused sharp criticism among a section of economists and other observers, as it has shown only a marginal impact of demonetization in GDP in the Q3 of FY 2017-18. The IMF and RBI, among other organizations have slashed India’s GDP estimate by about 1% in the third quarter (October-December) as a result of the recent demonetization. Even the Economic Survey of Government of India has acknowledged considerable impact, although short run impact, of the note ban on GDP. The CSO estimate shows only by 0.1% impact to 7% in the 3rd quarter of FY17-18. People around India have experienced and some have been experiencing the severity of the note ban. But the point is; why has the apex body of Indian statistics, CSO failed to estimate it.

GDP measurement and CSO

In India GDP is calculated by both the production and the expenditure approach. Through production approach DGP= Gross value added (at basic prices) + indirect taxes – subsidies. This is more reliable (EPW, July 16, 2016, TCA Anant, Chief Statistician of India) estimate of GDP as more reliable data are available for compilation. Anant considers the assessment on the expenditure side, based on much more limited data, leads to differences/ discrepancies on the expenditure side to match the GDP numbers emanating from the production approach.

A few things are to be taken care of. One, why has GDP estimation not adequately considered the hardship of a huge number of common people after demonetization? It is widely claimed that the informal or unorganized sector (covering about 90% people) is worst hit by the note ban. This sector is not adequately counted in GDP. This is why GDP estimate surprises many. Anant spoke of it on another occasion in some detail after the declaration of the GDP figure of the 3Q of 2017-18. Informal sectors mainly include agriculture, construction, non-corporate trade and manufacturing. Data of all these are not properly available. CSO compiles all these from indirect sources. For agriculture, its value addition is assessed
from data of acreage, cost of production and value of the products. All these are taken from the data supplied by the ministry of agriculture.

Secondly, construction data are also compiled indirectly from the growth of output and consumption data of sectors like steel and cement. Thirdly, the trade data are indirectly available from financial reports of companies. But for non-corporate trade, its volume indicators are derived from, say, the data of sales taxes. The major remaining sector is manufacturing. This is assessed with the data of IIP and Annual Survey of Industry. But the problem here is the data are available after a huge time lag. So the informal sector, which is hardest hit in the demonetized phase, is not reflected properly in the GDP estimate.

Other possible reasons behind CSO’s surprising GDP estimate

Fitch, a US based rating agency has also expressed recently its doubts on the CSO’s 3Q estimate. Some possible reasons, as have been pointed out by Professor Abhijit Sen, a former member of the erstwhile Planning Commission are one, the agriculture ravi crop data, which are the main concern for this purpose, of the Q3 will come ( except acreage) in April only and now CSO can compile only the kharif crop data. So proper assessment will take time. The volume of tax collection is a component of GDP. On higher tax collection Sen told BE that the increased tax collections may not be due to higher production. This seems to be the result of higher advance tax payment. Advance tax payments could be deposited in old denominated notes at that time. This could be an added factor to pay advance taxes promptly. In this case one has to wait for the next quarter to assess tax collection. Sen also pointed out another possible factor; higher sale of goods. Sen told BE that at that time, quite a large number of corporate and non-corporate reduced their stock of products by sending it to their clients’ godown. So stocks were transferred from producers’ to dealers’ godown. Sen thinks that in the next quarter a better picture could be expected.

Another factor is also important. The government spent a huge sum of money on infrastructure and a few other sectors. It also has an upwards pressure on GDP estimate. Prof. Ashim Dasgupta, a former Finance Mininster of West Bengal, has also pointed out that the CSO’s high GDP figures  may be dependent on a low base. Lower subsidy increases the figure of GDP. But its importance is not very high in this case.

Dominance of GDP which rules the world

From the time of the Great Depression of the 1930s the GDP has been an iconic number and dominating the world. “It was not designed to measure economic goods, meaning what is valuable for human life, but has been coolly applied to assess instruments of war and rebuilding occasioned by their destructive force on the same terms as foodstuffs, education and art,” wrote professor  Theodore M. Porter in GDP: Implication of a Number in the well-known journal, Economia. GDP was invented for the purpose of economic management to bring the depressed economies of Britain and the US nearer to their potential in the 1930s and subsequently assessed their capacity for war purposes. To look at it in different aspects a few popular examples will fit the discussion that GDP is meaninglessly reduced when a man marries his housekeeper as after marriage wives are not paid for household work and hence their services are not considered incomes. Or it assigns no value to a tree until it is cut down and consumed.

This is why Nicholas Sarkosy of France said, “We will not change our behaviour unless we change the ways we measure our economic performance.” He also said, “Our current use of GDP to monitor our economic performance and social progress is indeed an inadequate measure of our overall
well-being.” It is observed that most people may perceive themselves as being worse off even though average GDP is increasing. Yet the governments of developed nations continue to use this obsolete measuring stick that methodically indicates the economy is ‘improving slowly’. 

Conclusion

It is true almost all the economists, political observers and relevant agencies expected that the Indian economy would feel the considerable impact of demonetization. But the recent GDP estimate of CSO raised doubts among many about its methodology of calculating it. Some have gone so far as to consider the CSO’s estimate politically motivated. But this type of charge should be taken as the product of lack of acquaintance with the methodology
of estimating GDP. It is no doubt a technical and scientific issue. 

Actually the problem lies elsewhere. Attaching huge importance to the GDP itself is a mistake. Actually the concept of GDP hides more than it discovers. The real situation of the vast majority of masses of a country cannot be known from GDP estimation.

This is why three well known economists, Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, (also some other economists wrote on this issue on different occasions), wrote at length about the limitation of GDP in their book-Mismeasuring Our Lives, Why GDP doesn’t Add Up (2010). One should not target CSO. Target leaning towards giving overwhelming importance to GDP to judge the economic status of a country.