Modinomics: A speedometer-odometer mismatch

In January 2017, no sooner the demonetisation period was officially over, chief statistician T.C.A. Anant informed us: “The growth in GDP during 2016-17 is estimated at 7.1 per cent, as compared to the growth rate of 7.6 per cent in 2015-16.” He also said that the volatility due to the withdrawal of notes had been weathered and that the economy was back on the growth trajectory. Immediately the full official caboodle, right from the Prime Minister down to the patently ignorant party spokespersons, went to town and said that the ill-effects, if any, of the demonetisation were a passing blip and all was well.

What they didn’t tell the nation was that the data on hand was till November 2016, before that singular act of great stupidity was inflicted on the nation. This is typical of how this government misuses data to create the illusion of well-being. It is now known that demonetisation costs us much more. India’s GDP growth for the year is officially pegged at 6.1 per cent, a huge fall from the 7.8 per cent claimed for the previous year. Mind you, the 2015-16 growth factors in a deflation of 1.4 per cent, which means the nominal GDP growth was only 6.4 per cent. In the real world, it is nominal GDP which is more important as value addition, profits and taxes are computed, as they are without adjusting for inflation or deflation.

Demonetisation was supposed to be the great big magic wand to clean up the economy, elevate revenues and put us on a higher growth trajectory. None of this has happened. Cash transactions are once again the norm. According to RBI data, the number of digital transactions increased by 100 million to 200 million during 2014-16. This went up to 300 million till November last year. During the months of November and December 2016, when 86 per cent of the cash was withdrawn the number of digital transactions shot up to well over 500 million. In the first three months since currency curbs were withdrawn, the number of digital transactions fell to 350 million. This downward trajectory suggests hitting pre-demonetisation levels soon. Tax revenues mostly went up because of additional tax collections on the Seventh Pay Commission back dues.

GDP growth is like the number on the speedometer in a car. It tells us at the pace the nation’s economic car is moving. By knowing this, we can estimate the distance to the next destination. But suppose somebody tinkered with the speedometer to read more even when at zero? Even when the vehicle is not moving the meter will tell you it is moving, and when it is moving it will tell you it is moving faster than it actually is. This is what the Narendra Modi regime did in February 2015. The GDP growth rate was tweaked to put India on a higher trajectory, giving itself an added 2.2 per cent growth as a bonus. Since it was not real, it was like adding water to milk. Adding this gave us a growth of 7.4 per cent in 2015-16. Without this tweaking it would have been 5.2 per cent in line with the IMF’s forecast. If the Manmohan Singh government had done it a year earlier the growth in its last year would have been a healthy-looking 6.9 per cent instead of the dismal 4.7 per cent computed.

Tweaked speed on the speedometer gets caught out when speed and time cannot be reconciled with the distance travelled, and things like fuel consumption. The lack of new jobs, just 210,000 in the organised sector last year, and the falling investment to GDP ratio are some giveaways pointing of a lower speed. But the cacophony of lies orchestrated every day in the media, particularly on television, tries to drown out the reality. But like the mismatched readings on speedometer and odometer, the truth cannot be hidden for long. The GDP post-demonetisation is now officially fixed at 6.1 per cent. But take out that 2.2 per cent and it is actually moving at 3.9 per cent, or a good one per cent below that in the last UPA year, which left us so despondent that 31 per cent of the country took the economic prognostications of Narendra Modi and Baba Ramdev seriously, to give the NDA a mandate to take us out of the morass.

Several well-regarded economists have questioned the data that the finance ministry and the CSO are churning out. Derek Scissors of the American Enterprise Institute, who tracks the Chinese and Indian economies, equates the two when it comes to fudging data. Mr Scissors recently wrote: “Most people from pluralist open societies want to see pluralist, open India do well. For now, however, India has the same level of economic credibility as a country like Vietnam, which publishes GDP, results even before the year ends! World-beating growth? Maybe. Or maybe poorly founded quasi-propaganda.” Even Raghuram Rajan, the RBI governor, expressed concern about GDP data collection and analysis.

True or false, the figures put out by the government reveal an even more worrisome trend. While GDP growth has slowed down to 6.1 per cent, public administration and defence has grown by 17 per cent. These two heads are classified as part of the services sector. They account for about 15 per cent of services, which now account for almost 60 per cent of GDP. When announcing the acceptance of the Seventh Pay Commission’s recommendations of an across-the-board salary boost of 23 per cent, finance minister Arun Jaitley said that it will boost demand. Didar Singh, secretary-general of Ficci, said: “The pay hike of nearly `1 lakh crore for government employees will give a strong boost to consumer demand and help uplift the growth of the economy.” Clearly spending ever more on its employees is seen by this dispensation as a Keynesian pump priming of the economy. So what is happening here?

I have told this story before. I will say it again as its aptness to describe our leadership style has never been so exact. The Russians have a great joke on every misfortune they have to endure. One of the best I have heard is about Lenin, Stalin, Khrushchev and Brezhnev travelling together on a train when it unexpectedly stops. Then come up with suggestions to fix the problem. Lenin suggests a subbotnik or day of voluntary labour so that workers and peasants can fix the problem. Nothing happens. Stalin puts his head out of the window and shouts that if the train doesn’t move immediately, the engine driver will be shot. Nothing happens. Khrushchev then suggests to have the rails from behind put in front so that the train can start moving. Nothing happens. When his turn comes, Brezhnev says: “Comrades, lets draw the curtains, turn on the gramophone and pretend we are moving!”

There is a similar air of make-believe in this government’s persistent euphoria on the economic front.