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(Excerpted with permission from Penguin Random House. ‘Demonetization and the Black Economy’ by Arun Kumar is available on Amazon.)
The government’s argument that demonetisation has had no impact on the economy because growth has been robust, belies its own earlier exhortations to the public to bear the pain for long-term gains.
The numbers for the various parts of this component are based on data which comes from benchmark surveys conducted once every few years. In the meanwhile, some indices from the organised sector are used to project the data for these sectors.
How is GDP growth calculated? It is based on data from the various sectors and sub-sectors of the economy.
Data are needed from the sub-sectors, and because of the specificity of each of them a different method is used for calculating the growth rate for these sub-sectors. The methodology is changed from time to time as lacunae are found and fixed after consultation, and this practice is usually not questioned by analysts.
Surveys by manufacturers, business associations and other entities in December 2016 and January 2017 show that after 8 November 2016, employment, production and investment were hit hard in a whole range of sectors. Was this taken into account in the estimation of GDP growth?
The government document,15 ‘Methodology For Estimating Quarterly GDP’, says, “The production approach used for compiling the QGVA [Quarterly Gross Value Added] estimates is broadly on the benchmark-indicator method.” The document adds, “A key indicator or a set of key indicators for which data in volume or quantity terms is available on quarterly basis are used to extrapolate the value of output/value added estimates of the previous year.”
What the quotation from the government document means is that for the unorganised sectors for which data are not immediately available, some indicators are used, for instance, the ratio of production in organised industry to that in the unorganised sector, along with how much employment is being generated. But when the economy is severely impacted, can the same benchmark indicators be used as in earlier years?
Indeed not, because the ratio of the organised to unorganised sectors changed on 9 November 2016. So, how can the projection from pre-8 November 2016 be valid for the period immediately after? Projection from the previous year (2015-16) would be even less valid.
As already argued, the impact of shortage of cash was different for the organised and unorganised sectors, and therefore, the impact on their output was also different. That is why the ratio changed.
So, in the changed circumstances after 9 November 2016, it cannot be used to estimate the unorganised-sector production. The incorrect assumption is that a sub-sector that is declining is taken to be growing at the same rate as the organised sector.
The government’s press note adds, “IIP from manufacturing sector registered a growth rate of (-) 0.5 percent during April-December 2016-17.” But data show that the manufacturing sector grew at 7.7 percent. Is this an overstatement of the organised sector growth? If so, it is doubly wrong to use it to estimate the unorganised-sector growth.
A lot more data are needed. If that is so, the official estimates are premature. As such, instead of relying on official data, one should go by the reports of what is happening on the ground.
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