NEW DELHI—Finance Minister Nirmala Sitharaman’s claim in Lok Sabha last week that the Indian economy is not in trouble and that “green shoots” of recovery were visible is a “problem” and serious analysts should not use the expression, India’s former Chief Statistician Pronab Sen said in an interview with HuffPost India.
“Now, this is the problem. Any economic system will show volatility. This is the nature of economic systems. Things go up and down. If every time something goes up you say that’s a green shoot, then you have a problem. You actually have to look at the trend, not a one quarter or one month uptick,” he said.
“So you remember last time they were saying, “Oh! IIP is up, so we are good.” Well, IIP promptly went down the next month.”
Sen made the above comments a day after the Narendra Modi government released data pertaining to the Consumer Price Index (CPI) for January 2020 and Index of Industrial Production (IIP) for December 2019. While the CPI, or retail inflation, was the highest since May 2014 at 7.59%, the Index of Industrial production was at -0.3% for December 2019.
According to Sen, who was previously the principal economic adviser to the then planning commission, what these numbers essentially show is that, there is a “supply side problem in agriculture which is pushing up prices and you have a demand side problem in manufacturing which is pushing down prices.”
In other words, poor supply of onions and garlic, as well as other crops, caused a spike in food prices which reflected in high consumer price index in January and poor demand for manufacturing goods, which led to a drop in their prices in December 2019. The poor demand, he further explained, is due to the ongoing economic slowdown.
“Economics is not aspirin. It’s more like an antibiotic, you have to recognise the nature of the problem. Where does it originate and what can you do to address that? Now there is, I don’t think enough agreement on the origins of the problem. And that is where the real issue lies””
The economic slowdown is persistent, Sen said, because there isn’t “enough agreement” about the “origins of the problem”.
“At the end of the day, any solution has to be based on your diagnosis of the origins of the problem. You have to attack it at the source. You cannot attack at the symptoms level,” he said.
Adding further, “You know, economics is not aspirin. It’s more like an antibiotic, you have to recognise the nature of the problem. Where does it originate and what can you do to address that? Now there is, I don’t think enough agreement on the origins of the problem. And that is where the real issue lies”.
Sen, who was appointed to lead a special standing committee on statistics in late December by the Narendra Modi government, has a two point solution for the ongoing economic slowdown: a) get cash back into the rural economy and b) stop demonising cash because that’s how rural India operates.
“I am all for formalisation and moving to non-cash. Provided you have systems in place and people are able to transact without using cash. Those systems are not in place today; not in rural India. Even in urban India, they are not,” he explained.
Edited excerpts from the interview:
What do you make of the IIP and CPI numbers released by the government?
Well, you see, as far as the IIP is concerned, if you look at what has been happening for the last few months, it’s essentially hanging around zero. That’s what it suggests. If you take away the normal statistical discrepancies, zero seems to be a fairly reasonable way to go. Nothing much is happening. So basically it seems to be flat.
But why is that a satisfactory situation to be in for an economy like India?
No. Not in the least. It’s not a satisfactory situation.
The IIP growth doesn’t necessarily equal growth of value added in manufacturing. There are intervening variables like productivity increases, like differential movement in output and input prices, so all of those things have a role to play.
But nevertheless if we are talking about any kind of a reasonable growth in the economy, you would want to have manufacturing value added increasing somewhere around 7-8%. So what you would want for that to happen is that IIP should be growing somewhere around 4.5-5% at least. We are way below that. As I said, we are closer to 0%.
You also mentioned this one bit about the discrepancy between what the IIP numbers state and what the GDP numbers show.
You see, the GDP number is value added. The IIP is about physical production. Now the two are related, of course. But, you know, you can have 0% IIP growth and yet have positive value added growth through things, as I said, like productivity increases and differential price movements. But at the end of the day if you are thinking about employment, then what is critically important is what’s happening to volumes, which is what the IIP shows. It is not the GVA. GVA has absolutely nothing to do with employment, in fact GVA growth can be employment displacing as well. Yeah, so if you have labour saving technology coming in, that gives rise to productivity, then you can have positive GVA growth and employment going down. So employment is very closely linked to the IIP.
So will it be fair to say that this IIP number is a reflection of the poor state of employment generation?
It is a part of the same story.
“So what you are getting is a supply side problem in agriculture which is pushing up prices and you have a demand side problem in manufacturing which is pushing down prices.”
And what do you make of the Consumer Price Index number—highest in five years—which made headlines? What’s being said is that it is so because of seasonal spike in vegetable prices (interrupted)
Well, it’s actually an unseasonal spike. Because what you had was very late monsoons which led to crop damage and so on. That is primarily the case, but if you look at the CPI data more carefully though CPI is not the appropriate price data to look at for these purposes; on manufacturing, the inflation is very, very low. So what you are getting is a supply side problem in agriculture which is pushing up prices and you have a demand side problem in manufacturing which is pushing down prices.
If you could simplify this for our readers, by referring to supply side problems in agriculture, you are essentially talking about the spike in prices of onion and garlic that we saw due to poor supply, right?
Yes, yeah; which then trickles into other crops as well.
But will it be right to understand that these were the primary crops that were most affected?
Yeah. It is, it is. One of the issues that one needs to be little careful about is that the reality is probably not as bad as what the CPI is showing simply because the CPI now is seriously outdated. The CPI is based on 2011-12 consumption patterns. Now we are 10 years down the road. So the CPI desperately needs to be revised. My sense would have been that, if past patterns continued to hold good, then the weight of food in the CPI basket would go down quite significantly. So the inflation would be much more moderate than what is being reported.
It’s too far away, over the course of practically a decade now, so the basket could have changed quite a lot, so the CPI may not be very representative.
But given that these numbers are for a period in which food inflation peaked, and it was essentially the main concern about the economy, within the available methods of calculation, it would still be fair to say that the number does capture to a great extent what was going on, right?
No, no, it does capture; but you know, the thing is that, remember, your entire monetary policy depends upon not just the direction but also the magnitude. So if the CPI is overstating inflation, then we may be doing less of a monetary expansion, than we should be.
Will the statistics committee that you head right now look at revising the base year and formula for calculating the Consumer Price Index?
For doing that we need to have the household consumption expenditure survey, that is where you get the CPI weights from. We had one in 2017-18 but the government has junked that. So now the next one is being planned for 2020-2021. It will be released sometime in 2022. We are quite far away from there.
So, in the interim period, we are basically working with imperfect or probably imprecise data. How would you characterise the present data that we are working with?
You have no choice but to continue with the old weights. We have no data to change the weights of the different commodities in the Consumer Price Index basket. Till that data becomes available, you just have to continue with the old ones.
So essentially, the numbers released point us in the right direction but you are not certain about the extent (interrupted)
The magnitude of inflation.
But you remain concerned about the inflation problem as such. Is that right?
Well, no. In fact, my concern is elsewhere. You see, when you have high food inflation, there are two things you need to be very conscious about.
The first is what will happen to non-food prices. Now, as far as non-food prices are concerned, manufacturing prices are trending down. They are not trending up. So there is a downward trend and, if things get worse, you could be slipping into deflationary territory, where inflation goes into the negative territory. That’s one thing you have to keep in mind so you have to look at non-food inflation as well and see what’s happening there.
What are the consequences on the economy in a real sense, not only the theoretical?
What happens if prices go into negative territory, then viability of industries gets jeopardised. Because when companies borrow money, they assume a particular level of inflation at which they can service their debt. If inflation is much lower than debt, particularly negative, then they have a hard time paying back.
The second thing you have to remember are commodities where households will actually divert income from other goods and services to keep their food consumption the same. You have a very low elasticity of demand so what happens with high food inflation is, by and large, demand for other goods and services goes down. So if you already have a demand deficiency for all other products, this will make it worse. That seems to be the situation. That is more worrying than the food inflation in itself, or the headline inflation for that matter.
This is interesting because, among some analysts, the word ‘stagflation’ seems to be frequently used to describe where the Indian economy could end up. But what you are talking about is a different argument.
It is a different argument.
So you don’t see any possibility of India facing stagflation.
You see, stagflation, by and large, is a situation where there is a growing demand deficiency and a cost push inflation. So the stagflation term actually originates, If you go into its etymology, it originates in the oil price shocks. Where commodity prices globally went up because of oil and demand contracted. In the 70s and again in the 90s.
I was asking also because wage growth is terrible.
Wage growth is terrible. So think of families having roughly constant incomes with food prices going up. So what will end up happening is that they will shift their consumption pattern to protect their food consumption and will cut down on other so-called discretionary components.
And there is a possibility that in the months of December and January, the most recent months for which data was released, something like this happened.
“the whole green shoot thing is only for talking. Serious analysts should not be saying green shoots. Because green shoots would be when you are saying overall, across-sector either things bottoming out or starting to turn up.”
So that then nullifies or reduces the “green shoots” in the economy that Finance Minister Nirmala Sitharaman referred to, right?
Now, this is the problem. Any economic system will show volatility. This is the nature of economic systems. Things go up and down. If every time something goes up you say that’s a green shoot, then you have a problem. You actually have to look at the trend, not a one quarter or one month uptick. So you remember last time they were saying, “Oh! IIP is up, so we are good.” Well, IIP promptly went down the next month.
So the whole green shoot thing is only for talking. Serious analysts should not be saying green shoots. Because green shoots would be when you are saying overall, across-sector either things bottoming out or starting to turn up. If you are seeing components going down, worry.
Some analysts have said inflation may have bottomed out now. What do you think?
That is quite likely, unless some other disaster happens in the middle. Because the agricultural cycle, particularly for horticultural crops, is three to four months. And it’s been three to four months since food prices shot up. So there is a good chance that we have bottomed out of this or topped up, as the case may be.
So there is some cause for optimism then.
Yeah. But in order to get that, you have to track what is happening at the mandi level, which I don’t do. I am not sure they are doing it either.
I want to come back to the point you made about the manufacturing sector. You mentioned that, when you look at the data closely, you find that there are demand side problems pushing down prices. Could you elaborate?
As far as the manufacturing sector is concerned, incomes are not growing. Okay? Manufacturers are increasingly having a difficult time selling their product. So you are seeing large discounts happening. So that’s what is going on.
So that is a reflection of stagnant incomes, isn’t it?
What can be done to revive income? Does the budget give us enough tools to revive incomes?
Not really. So far as I can make out, there has been no real push towards increasing demand in the budget.
The new personal income tax scheme announced by the finance minister Nirmala Sitharaman in the budget won’t help?
It’s very small. And how much benefit will actually accrue isn’t all that clear. Because much of it depends on how many people switch and how many people don’t switch to the new system. That’s not clear at all.
Also, it doesn’t address the source of the problem ie: rural India, right?
No, it doesn’t address the source of the problem.
So the problem of slowdown and stagnant incomes is going to persist with us for a while now.
Well, that’s what it looks like, yes.
What do you think should be done to address these stubbornly persistent problems?
At the end of the day, any solution has to be based on your diagnosis of the origins of the problem. You have to attack it at the source. You cannot attack at the symptoms level. You know, economics is not aspirin. It’s more like an antibiotic, you have to recognise the nature of the problem. Where does it originate and what can you do to address that? Now there is, I don’t think enough agreement on the origins of the problem. And that is where the real issue lies.
I could give you a long spiel on what I think is the origins of the problem, I am already on record, there is nothing new, if you google my writings, you will get it. But my sense of it is that the origins of the problem is rural distress, which started well before this government, started in 2012 or thereabouts, but got exacerbated by demonetisation. Now if that is the nature of the problem, you have to recognise that, till such time as systems are in place where non-cash transactions can happen in the rural economy, to discourage the use of cash is a self-defeating set of decisions. And this has been happening repeatedly. Cash has been demonised in the system.
That’s fine. I am all for formalisation and moving to non-cash. Provided you have systems in place and people are able to transact without using cash. Those systems are not in place today; not in rural India. Even in urban India they are not. So, at this moment, my thing would be: 1) please get cash back into the rural economy. 2) stop demonising cash because that’s how rural India operates. Until you have enough evidence that rural India has been able to move into a non-cash transaction mode, don’t do anything drastic.