Inflation and GDP: Double data jeopardy

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V Raghunathan

Having served as the Chief Economic Advisor of the Government of India from 2014 to 2018, Arvind Subramanian (AS) has no business criticizing the GDP computation of the GOI, unless he did what he could during his tenure as CEA to set matters right. However, if he did anything to correct such distortion during his tenure in the government, there is little evidence. On the contrary, even when it came to demonetization, his comments when in the government and when out of it were a study in contrast.

One may say that a senior government functionary cannot be inside the government and be critical of it, and that it would be unfair to find fault with AS on that score. Fair enough.  But if so, what would be more becoming of AS now, is to throw more light on what he tried to do to set this (GDP) distortion right when he was part of the government rather than criticize the fact of distortion itself (which in any case is fairly well known), now that he is out of the government.

This is not to say AS may not be right in his claims. In fact, he is correct. That the GDP computation is significantly overstated is probably true, and also widely known.  AS suggests that the overstatement precedes NDA I, and goes back to 2011. Well, I would go back further.

A former class fellow and a senior Indian Statistical Services civil servant from the Ministry of Statistics told me several years ago how GDP (and inflation) calculation was frequently a backward exercise, meaning, the politicos hint what GDP (or the inflation) rate they wish to show in a particular period and the babus get on with the job of making it so. After all who does not know what you cannot do with statistics?

That takes us to the whole business of data distortion. Of late, it is the overstatement of GDP that has caught has been front page news. Not many seem to speak of the other distortion, namely the understatement of inflation.

Consider the inflation rate or the CPI or consumer price index data from 2014 until 2019. We are told the successive inflation (CPI) indices are about: 2014-5.8 per cent; 2015-4.9 per cent; 2016-4.5 per cent; 2017-3.6 per cent; 2018-5.24 per cent and 2019-3.6 per cent. Well, if you got a queasy feeling that these rates seem nowhere close to inflation we actually experience in our day to day life, well, you may not be alone.

But isn’t inflation calculation a purely objective exercise, with inflation defined as (Cost of Market Basket in a given year divided by Cost of Market Basket in the base year)x100? Well yes. That’s what we studied in our high school Economics.

So then how can it be manipulated, thinks a common man. The fact is, a wide variety of product categories and products go into that ‘Market Basket’. For instance, CPI calculation involves categorizing the products in the market basket into Food and Beverages; Pan, Tobacco and Intoxicants; Clothing and Foot-wear; Housing; Fuel and Light and Miscellaneous. Each of these categories includes a host of products. For example, miscellaneous alone would include furniture and fixtures, education, transportation, entertainment and so on and on. Even with the best of intentions, the process of upright estimating inflation must involve selection of samples without any bias, to be able to obtain an unbiased estimate of the inflation.

But when the intentions are biased, say, when the statistical estimation processes are bulldozed, brow-beaten or incentivized to yield a desired level of inflation, all one has to do is to vary the dates of data collection, the specific products, the product brands, locations from where the prices for the basket products are obtained, the very categories in the basket, or the base period and so on, until one gets the desired result!  As they say, if you harass the data long enough, you can arrive at any conclusion. Nobody knows this better than government babus. Naive is he who believes this does not happen.

Also consider it all at a more intuitive level. For most of our products and services, salaries and wages comprise the most significant components of input costs. They probably account for 60 to 70 per cent of the costs of most basic goods and services. Now, the rate of our annual increase in salaries over the last two years has been about 9.5 per cent. So how likely is it that our inflation growth rate is only 3 to 4 per cent?

All right, you may say, ‘but 90 per cent of the Indian labour is in the unorganized sector, so the annual increase in salaries is bound to have very little effect on the real economy.’ But then, according to The Economic Times (Nov 27, 2018), “India recorded the highest average real wage growth in South Asia during 2008-17” the rate being 5.5 per cent. If so, how could our inflation rates be in the vicinity of mere 3 and 4 per cent?

So as I see it, the biggest data manipulation our governments indulge in is not just GDP computations but inflation computations, which seems to be little studied. Perhaps as much or may be more than the GDP computations, some independent body of economists must also look into our inflation computations.

DISCLAIMER : Views expressed above are the author’s own.

via TOI Blog

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