Will Political Strength Lead to A Bold Budget?
The first lady finance minister in 50 years is slated to present a budget amid great expectations in an era of political stability. But all is not hunky dory. Growth of gross domestic product (GDP) is projected by the Reserve Bank of Indi (RBI) at 7.1% for the current fiscal. Data from CEIC reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter, although business confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%. 
 
Meanwhile, household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019, declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space. 
 
World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above the poverty line and subsidies should sharply decline. But the Union and several States are releasing more and more unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!
 
Statistics from the National Council for Applied Economic Research (NCAER ) place the middle-income population at around 153mn while the lower middle-income population stands at 446.3mn (Krishnan & Hatekar, EPW 2017). Salaried persons still constitute the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against money being squirelled away to tax havens. Hiding income is honourable and paying taxes, honestly, unwise. This situation unfolds a great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales. 
 
There is a case for taxing the rich among the farmers by defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought. But a stable govermment can fight this, trading off with the benefits for the rest of the farm sector.
 
Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.
 
The rural-urban hiatus can be addressed adequately by encouraging investments in modernising agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will kill two birds at one shot: achieving employment and economic growth.
 
The government should stop incurring public debt to save irresponsible banks with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the chairpersons. Governance improvement should be the focus and the RBI should withdraw its executives from all bank boards so that its regulatory rigour can be ensured.
 
Women have more courage than men when it comes to the question of saving a child from disaster. Madam Finance Minister should be able to pull it off.
 
*The author is an economist and risk management specialist. The views are personal.
 
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    Clear indication of economy losing traction: RBI Governor
    Reserve Bank of India Governor Shaktikanta Das had, in the last Monetary Policy Committee (MPC) meeting, said that there is clear evidence of economic activity losing traction while giving the rationale for a rate cut.
     
    "Overall, there is clear evidence of economic activity losing traction, with the GDP growth in Q4:2018-19 slowing down to 5.8 per cent," he said, as per the minutes of the last MPC meeting.
     
    Das further noted that "growth impulses have clearly weakened", while the headline inflation trajectory is projected to remain below 4 per cent throughout 2019-20 even after considering the expected transmission of the past two policy rate cuts.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    India’s GDP Controversy – II: Why Arvind Subramanian Was Incorrect
    Yesterday, I explained how to really measure gross domestic product (GDP) figures. The 2.5% figure is arrived by adopting the statistical technique of ‘difference-in-difference estimation (DID)’. “DID is used to estimate the effect of a specific intervention or treatment (such as a passage of law, enactment of a policy) by comparing the changes in outcomes over time between a population that is enrolled in a program (the intervention group) and a population that is not (the control group)” [See technical details here]. 
     
    On page 9 of his paper, Dr Arvind Subramanian explains this logic in these words: “[h]ere the treatment is the methodology change in India; the treatment period is post-2011.” 
     
    However, certain assumptions must be met for the results derived from DID to be reliable. One of the assumptions is that there should be no exchange between the intervention group and the control group. 
     
    The 2016 survey of United Nations Statistics Division (UNSD) clearly shows that member countries have adopted the 2008 system of national accounts (SNA) at different points in time. By fixing the treatment time as 2011 on a sample of 70 odd countries, Dr Subramanian’s study inadvertently violates this assumption. For example, Eurostat Korea and Singapore implemented the 2008 SNA in 2014, they are present in both the intervention group (pre-2011) and the control group (post-2011). 
     
    Furthermore, since the 2008 SNA is work-in-progress, another critical assumption that composition of intervention and control groups should be stable over time, is also violated invalidating his panel results. 
     
    Thus, my understanding is that Dr Subramanian’s results are biased and unreliable.
     
    The bias in the 2.5% figure has two sources: one, the change in the composition of the intervention and control groups over the study period; and second, the existing bias in growth rates is due to outdated base years in many member countries. 
     
    In conclusion, what lessons can be drawn from this controversy? The writer believes that the Central Statistical Organisation (CSO) did not cook the numbers and was only complying with the 2008 SNA. But the CSO did fail on many occasions to provide cogent responses to some very pointed question posed by many subject experts. 
     
    As a result, the discourse has turned noisy, prompting the chairman of Economic Advisory Council to the Prime Minister (PMEAC) to defend what should normally be CSOs turf. It is advisable that EAC’s response, which should ideally be a white paper, addresses not just Dr Subramanian’s findings but also doubts raised by others. 
     
    Specifically, the EAC must explain its reservation on the use of double deflation or the Samuelson-Swamy Theory of Index Numbers, issues in respect of MCA 21, etc. 
     
    The constraints faced by the CSO also need some attention. The 'outcome budgets' (OB) 2016-17 for the ministry of statistics and programme implementation (MOSPI) paints a somber picture. 
     
    There is a manpower shortage in the subordinate statistical service and field operation division (FOD) due to which sample surveys have to be conducted through contractual staff affecting quality of data collected. The National Statistical Systems Training Academy faces non-availability of faculty members for training. 
     
    Centralised selection creates a mismatch between the language known and the language required for statistical surveys in the field. 
     
    In the light of these facts, the suggestion that “GDP estimation must be revisited by an independent task force, comprising both national and international experts, with impeccable technical credentials and demonstrable stature” shows gross disconnect with practical realities faced by CSO. 
     
    One hopes that the government will address some of these issues and contain the damage already done. This would perhaps be the best possible step in pursuit of a final closure. 
     
    (The writer is an economist in the banking sector. The views are personal)
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    COMMENTS

    gcmbinty

    3 months ago

    Not being a qualified economist, I don't think I should comment on the methodology of calculating GDP.

    shadi katyal

    3 months ago

    We were looking for some explanation and his claim of reason of Dr. Subramanian 's
    figures being wrong.
    He does blame the CSO for failure to reply or clarify any data but how does that can be blamed on Dr. Subramnian.
    What is his final data if he knows or was this just an exercise to prove what.

    Krishnaraj

    3 months ago

    Feels like the author is trying to make his case by drowning us in jargons and complicated logic.

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