On June 8, 1891, an irate reader wrote to the editor of British newspaper, The National Observer, “Sir, it has been wittily remarked that there are three kinds of falsehood: the first is a ‘fib’, the second is a downright lie, and the third and most aggravated is statistics.” Fifteen years later, Mark Twain repeated this in his Chapters from my Autobiography, observing, “Figures often beguile me, particularly when I have the arranging of them myself.” In the past decade, figures have more than beguiled India’s economic policymakers—they have confused and misled them into enacting policies that have had a devastating effect upon the economy, and on people’s lives. Last week’s quota of fresh statistics helps us to understand why. On February 8, the Central Statistical Office sent a wave of euphoria through the country’s economic establishment by announcing that the GDP would grow by 7.4 per cent in 2014-15, and not the 5.4-5.9 per cent it had predicted till then. This would make India the fastest growing economy in the world. India was thus about to achieve its long cherished dream of overtaking China’s growth which is slated to be 7.3 per cent this year. What is more, in the previous year it had grown by 6.6 and not 4.7 per cent as calculated earlier.
The new estimates set off a burst of self-congratulation. Incurable optimists see this as a vindication of Goldman Sach’s prediction, made a fortnight earlier, that India’s GDP would overtake that of the US by 2050. The corollary is that the government need not worry about economic growth. RBI governor Raghuram Rajan is on the right track when he refuses to bring interest rates down till he is absolutely convinced that inflation has been licked. For the high rates of the past four years have clearly not affected economic growth.
What is more, since the consumer price index for January (the CSO released that four days later) shows that CPI inflation rose from 4.38 per cent in December to 5.11 in January, the new GDP data make it all the more unlikely that Rajan will lower interest rates by much after the budget is presented.
But here lies the rub: what are we then to make of the data on industrial production that the CSO released on the same day? These have shown that, belying all the hype of the past several months, there has not been even a flicker of revival in industry. Industrial growth had slumped back to 1.7 per cent in December, after having perked up to 3.9 per cent in November. This has brought the overall increase in the October-December quarter down to a paltry 0.46 per cent, which is even lower than the average for the previous four years. And just two days later, a study of the profitability of 2,941 companies that make up the bulk of modern industry in the country showed that profits for this quarter had declined by 16.9 per cent, making them the worst in 15 months.
How does one reconcile these starkly opposed data? The answer is that one can’t, for both the GDP and the CPI inflation data have been calculated on a new basis that makes them non-comparable with earlier data. The base year for the current GDP series is 2004-5. In addition, the new index incorporates data that were not even available to the old. Finally, the new index abandons the outmoded measure of GDP at factor cost and replaces it with GDP at market prices. This has not only pushed aggregate GDP up but also the monthly and quarterly growth rate. Similarly, the base of the cost of living index has been shifted from 2010 to 2012. This has reduced the weightage given to food, beverages and tobacco in the index and increased that of health, education, transport, housing, manufactures and miscellaneous items.
Updating the base of statistical time series data is a normal practice, but what every responsible statistical office does is to recalculate the data for the period covered by the old series with the new weights, publish these, and give a linking factor that analysts can use to make older data comparable with the new. The CSO has done this for the cost of living index, and this allows us to see that much, if not all, of the 0.73 per cent rise in CPI inflation in January over December is caused by the shift of the base year to 2012.
But it has given no linking factor for the GDP data, possibly because the changes made in its computation are so drastic that it will take a fair bit of time to construct it. Till it does, the government’s policymakers will do well to stick to the old series for arriving at their conclusions. For since 2011-12, the rate of growth of GDP has fallen from an average of more than 8 per cent a year in the previous eight years to between 5-5.5 per cent. Investment in industry and infrastructure has dropped to less than a quarter of what it was in 2010-11 and the growth of manufacturing has been stalled at close to zero for more than four years.