India's new GDP series (base 2011-12)

Past Data

  When constant price GDP is re-based we need 5-10 years of backward data to determine growth trends as per new series. This is because all growth rates will change (in principle). It is impossible to make judgements of trends with only 2-3 years of data. Thus it is going to be very difficult to predict likely GDP at 2011-12 prices(new series) for 2014-15 or to make projections for 2015-16.
     Certain analysts in the media have taken the two new growth rates available for the new series and combined them with growth rates for earlier years from the old series to produce five or ten year averages. This is not only technically incorrect but can produce completely wrong results (for past real average growth rates). The DOS must produce the back series, as they have always done in the past. Such back series are never perfectly consistent with the new series because of less data, but are much better than using the old series for earlier years (spliced or otherwise).
    Two short term conclusions can however be made from the growth data for two years. There seems to be the start of a recovery in Private Consumption Expenditure(PFCE) and in Fixed Capital Formation(GFCF). If these are confirmed in the 2014-15 data, to be published shortly (February 9th ), this will confirm that we have passed the trough of the investment cycle and are firmly on the path to recovery.
    Incidentally there is little change in the nominal value of GDP for the last two years for which data has been made available. Consequently ratios, such as Fiscal deficit and Revenue deficit (as a per cent of GDP) are highly unlikely to change (ie changes will come within the rounding error).

Advance Data(PS 9/2/15)

 The advance data for 2014-15 came in on February 9, 2015 as expected. These data show an increase in the growth rate of Gross Value Added at basic prices (GVA) by 0.9 per cent point. The GVA is the equivalent of what was earlier called GDP at Factor Cost. In my post-budget forecast in July 2014, I had projected that GDP FC would grow approximately 1% point faster in 2014-15 than in 2013-14.  A few months ago, one had suggested that the delay in monetary easing by RBI, despite the dramatic downtrend  in inflation, would likely result in under shooting of this target. Thus a 0.9% point increase in the growth of GVA confirms our prediction, despite the re basing of the GDP to 2011-12.

     The advance data also confirm the revival of both private consumption and fixed investment. Thus Private Fixed Consumption expenditures (PFCE) growth has acelerated to 7.1% in 2014-15 from 6.2% in 2013-14. similarly the growth of Gross Fixed Capital Formation (GFCF) has accelerated to 4.1% from 3.2%. Thus one can be reasonably confident that the investment cycle has bottomed 2012-13 and is now firmly on the upswing.

   The third point to note is that inflation trend has clearly reversed. The most widely used and accurate measure of inflation globally is the private consuption price deflator. This shows a dramatic decline in inflation rate to 5.4% in 2014-15 from 8.5% in 2013-14 (and 9.4% in 2012-13). 

  The fourth noteworthy point is that Govt consumption growth has accelerated further in real terms from 8.2% in 2013-14 to 10% in 2014-15. This highlights the urgent need for fiscal consolidation through a reduction in the revenue deficit that will make space for funds to be transferred to  govt investment.

Forecast for 2015-16

 In my post budget review I had forecast a further increase in the growth rate by 0.5% to 1% point in 2015-16 above the growth rate in 2014-15. Given the new GDP series and the focus on what used to be termed GDP MP, I know expect GDP growth to accelerate by 0.5% to 0.75% point above the final 2014-15 number. 

Interview

You may also see my Rajya Sabha TV Interview/discussion on You tube at  https://www.youtube.com/watch?v=rWecsNj7CRc&feature=em-uploademail

The India-USA Mini Nuclear Deal

Introduction

   The India-USA nuclear agreement referred to in the January 2015 Joint statement of President Obama and Prime Minister Modi needs to be viewed in a historical context.  There are too many educated people in India who believe that the India-US nuclear deal of 2005 was mostly  about civil nuclear co-operation and about US selling nuclear reactors to India. This represents a dangerous misunderstanding of India’s perspective and National interest.

India-USA Nuclear Agreement (2005)

   The 2005 Indo-US nuclear agreement was, from India’s perspective mostly about Strategic & Defence technology. These are technologies, products and services that are not governed by normal rules of competitive markets. Their development, production, sale and export is controlled by all countries who have the capability to develop or produce them.  The 2005 deal was a game changer for India, because it promised to break the “technology denial regime” (termed “Nuclear Apartheid” by us) covering a wide range of “Strategic Technologies”, put in place under US leadership, to punish India for its PNE (nuclear test) in May 1974.  Geo-politics and domestic politics of the two countries, made it necessary to give “peaceful nuclear energy co-operation” a central position in the public discourse, even though its importance to India was small compared to that of “strategic technology”(1/4^th of total say). 

  India’s “Nuclear liability law (2010)” appeared however to jeopardize the ‘peaceful nuclear co-operation’ element of the historic deal, the basis on which many influential Americans either supported or reluctantly acquiesced to the deal. The slowdown, and a few major reversals, in economic reforms from 2010, which halted progress toward more open, market based development, accentuated the sense of betrayal among influential US lobbies, leading to an unpleasant counter reaction. PM Modi, with his new approach to economic and foreign policy and President Obama’s appreciation of this approach, has put India-USA relations back on the rising trend, from which it was derailed in the previous 4-5 years.

Mini Nuclear Deal (2015)

    The India-US mini nuclear deal clears the logjam created by the Nuclear Liability law, which under communist cum leftist pressure, broadened potential liability for nuclear power accidents, much further and deeper than any other country’s law (opening space for individuals to sue original supplier for personal damages). This “social revolution” could also have ended Indian nuclear power development for good, much to the delight of anti-nuclear activists. A broad political solution has been found around this law, as well as an equally unreasonable demand for universal & lifetime tracking of nuclear supplies by USA itself, rather than by the agency IAEA, responsible for such tracking under multilaterally agreed rules.

Implications & benefits

    A number of analysts have pointed to the fact that, there is no public document giving the specifics of this agreement and that it is not clear whether US companies will actually determine that the risks are now reduced sufficiently to make it profitable to set up nuclear power plants in India. In my view, this is the least important part of the mini-deal from our perspective. 

      For India, it is more important that the deal opens the way for similar operational agreements with Japan, which is an important supplier of nuclear reactor vessels and major equity holder in US Westinghouse Corporation. Similarly the India-Australia agreement on Nuclear co-operation can now be quickly operationalized, to start supply of Uranium for use in India’s Nuclear power reactors. 

    Most importantly, It clears the way for US to resume action on its commitment to assist India in joining the four technology clubs (NSG, MTCR, Wassener Agreement, Australia Group) which still impede India’s access to “strategic” technologies, parts and components. The full promise of the India-US nuclear deal (2005) for India will only be realized once we are admitted into these control regimes.

China's Growth relative to India's

   I have predicted since the early 2000s, that China's Growth rate will decline below that of India's around the middle of this decade [ Figures & Tables ]. Both the World Bank and the IMF have come around to this view in their latest forecasts.

The projections were based on the theory and emperics of "Catch up" growth. Very succinctly the reasoning is that with the right policy poor economies(low per capita GDP) can grow much faster than the advanced economies(high per capita GDP) and thus close the gap between them. Maintance of the higher growth rate requires further policy and institutional reforms. However, even if appropriate policy reforms are made, the  growth rate will still slow down gradually, though it can remain higher than that of the developed countries.

China, with its unprecedented growth rate which averaged close to 10% over 30 years, seemed to continually violate this rule. Nevertheless, I had projected that it would start slowing down in the 2010s. The advent of the Global Financial Crisis, increased my confidence that it would happen. The fact that it recovered quickly and continued to grow faster than India, was easily explained by pump priming, through large injection of credit, given its party controlled banking system.  My judgement in 2010 was that such pump priming could be maintained comfortably for 3 years and would start getting dangerous after 5 years. Five years have now passed since the huge injection of credit started, and the dangers of a debt default related melt down with keep rising, unless China stops the excessive pump-priming.

There are two views about its future growth trajectory. One is that China will undertake the needed re-orientation in the economic policy framework (from investment to consumption and from manufacturing to services) and growth will slow to the 5,5% to 7% range. The other view is that if it continues the credit fueled growth (some say even otherwise) its growth could collapse to the 3-4.5% range. I continue to believe that the former is the more likely scenario.

Indian economic growth averaged about 7.7% for the decade from 2002-13 to 2011-12.  However, as I had warned in 2009 [in my last economic survey(June 2009) as CEA and in follow up interviews], India's high growth shouldn't be taken for granted. Unfortunately this warning (and subsequent ones) were not headed and growth collapsed from 2011 to 2014.  With the reform steps taken and in process since last year, I expect growth to recover steadily to its full potential by 2018-19. The trend growth rate of India will therefore exceed that of China by the end of this decade.  However, at the growth rates that I have projected (till last year), India.s economy will be only be half (1/2) the size of China's by 2025 (in real PPP terms).

[Great Powers & Super Powers ]

NITI AYOG

Introduction

     The “Yojna Aayog” or “Planning Commission” has been replaced by the “National Institution for Transforming India” or “NITI” for short.  From “Yojana” to “Niti” what is the difference?  First and foremost a sharp break from Soviet inspired National Development (Five Year) Plans to “Niti”, that is “Policy” and Institutional change for ‘transforming India’.  Para three of the cabinet resolution states that, we “require institutional reforms in governance and dynamic policy shifts that can seed and nurture large-scale change.”

Policy And Institutions

“Development” is one of those words that everyone thinks they understand but means many different things to different people. It covers a multitude of possibilities as well as a multitude of ideological sins and special agendas. The cabinet resolution constituting the Niti Aayog approvingly quotes Mahatma Gandhi “Constant development is the law of life, and a man who always tries to maintain his dogmas in order to appear consistent drives himself into a false position”. The Planning Commission took its first tentative steps towards “policy” 28 years ago, by creating a post of Advisor Development Policy. There was so much resistance, that the Advisor (yours truly) had to be designated Advisor-Development Policy Research.” Despite decades of effort, policy solutions always played second fiddle to increasing Plan allocations and expenditures without any ‘social benefit-cost analysis’ or ‘Macro-economic models’ to back the decisions.[i]

   Three other points in the introductory part of the Cabinet resolution setting up Niti Aayog are noteworthy: First is the assertion that “our aspirations have soared and today we seek elimination, rather than alleviation, of poverty” The second is the important role given to governance in achieving desirable social outcomes:  “The people of India have great expectations for progress and improvement in governance, through their participation. They require institutional reforms in governance and dynamic policy shifts that can seed and nurture large-scale change (para 3).” Subsequently there is an indication of how the institutional reforms in governance can be brought about: “Government and governance have to be conducted in an environment of total transparency – using technology to reduce opacity and thereby, the potential for misadventures in governing(para 6 g).”

   An EPW (2002) paper had raised the issue of corruption & governance and to bring policy-institutional reform into the development debate, to no avail.[ii] A debate on Poverty elimination, as against alleviation, was sought to be initiated in 2005-06 through a Planning Commission paper, but was stymied.[iii] It is therefore very encouraging that this is an important part of the mandate of the Niti Aayog.

Third, is the recognition of a changed reality of economy, society and Government functioning and its implications: “India needs an administration paradigm in which the government is an “enabler” rather than a “provider of first and last resort”. The role of the government as a “player” in the industrial and service sectors has to be reduced. Instead, government has to focus on enabling legislation, policy making and regulation (para 6a)” Many old style development planners refused to accept these changes ( even if they paid lip service to it), though this issue was raised first in 1990s & subsequently in the 2000s.[iv] A recognition of this reality by the Union cabinet provides a sound basis for closing the technology gap between India and Advanced countries, that is correlated with the large income gap between us. The reference to the role of Urbanization (para 6g) as an aid to technological catch-up, suggests an understanding of the links between technology gaps and per capita income gaps. This further links to Welfare gaps through the statement, “Equality of opportunity goes hand in hand with an inclusiveness agenda(para 8c).” The open discussion of the global environment and its two way interaction with India, also displays a degree of self-confidence vis-à-vis foreign countries (para 6c) that bodes well for building a competitive fast growing economy.

Niti Aayog

So what is the specific role of Niti Aayog in this changed environment: Its primary/central role is to, “Serve as a Think Tank for the Government”.. “to give “strategic and technical advice across the spectrum of key elements of policy. This includes matters of national and international import on the economic front, dissemination of best practices from within the country as well as from other nations, the infusion of new policy ideas and specific issue-based support.” (para 11). Several of us have argued for a long time, without much success, that the Old Planning Commission should evolve into a “Think Tank” with a primary emphasis on policy and institutions, rather than on expenditure programs and projects. By its bold move to abolish the Yojna Aayog and set up the Niti Aayog the new Government has set the stage for a wholesale transformation in this direction. Given the absence of any formal social benefit-cost analysis of programs and projects and the limited capacity for appraisal of outcomes, one had also suggested to the Deputy Chairman a decade ago that the Planning Commission develop a data base of best practices to guide future decisions.  It is hoped that a full fledged division will be set up in the Niti Aayog to translate this into reality, with all such information digitally accessible to experts and policy makers.

   Some of the specific objectives of the Niti Aayog are, at the level of generality of the Cabinet note, not significantly different from those of the Planning Commission or other organs of Government. However, the following objectives suggest a greater priority and emphasis on the issues mentioned in them: 

  1)    To design strategic and long term policy and programme frameworks and initiatives, and monitor their progress and their efficacy. The lessons learnt through monitoring and feedback will be used for making innovative improvements, including necessary mid-course corrections

   2)    To provide advice and encourage partnerships between key stakeholders and national and international like minded Think Tanks, as well as educational and policy research institutions

   3)    To create a knowledge, innovation and entrepreneurial support system through a collaborative community of national and international experts, practitioners and other partners

   4)    To maintain a state-of-the-art Resource Centre, be a repository of research on good governance and best practices in sustainable and equitable development as well as help their dissemination to stake-holders

   5)    To focus on technology up gradation and capacity building for implementation of programs and initiatives

      In the first of these, the emphasis on “lessons learnt” is very important. Experience confirms a great reluctance to modify or junk programs when they don’t work. Vested build up and become so strong that it becomes impossible to overcome them.

 In the second the emphasis on interaction with international think tanks and Indian educational and policy research institutions, though expected from a ‘Think Tank for the government,’ would be a departure for Indian bureaucracy.

In the third, the emphasis on support systems, rather than funds/subsidies is an important departure.

    The fourth reinforces what was said earlier about good governance and best practices and suggests that improvement in governance will be seriously pursued to improve delivery of government social & welfare programs.

In the fifth the recognition of weak capacity and need for “capacity building” for implementation is critical to success of all new initiatives and many failed/failing old ones. For instance Urban development won’t work properly, unless we train hundreds of Urban planners. Similarly, setting up of traditional “Bric and Mortar” educational institutions (as against e-learning/education) will be quite ineffective unless we have scores of highly trained professors.

Conclusion

   The abolition of the Yojana Aayog and its replacement by the Niti Aayog, by the new government, is a bold and long overdue initiative.[v]  It will help change the emphasis from Projects and programs to Policy and institutions, from expenditure inputs to real outcomes through better governance and from political disputation over Incremental allocations to new challenges and opportunities in a global environment. The discussion of India in a global context also reminds one of Gandhi ji’s saying, “Let the windows of my mind be open to winds from across the World, but let me not be blown away by them.” Like all new institutions, it will be an extremely challenging job for Niti Aayog to fulfill its high objectives.

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A version of this article appeared on the OpEd page of The Hindu of 18^th January 2015, under the banner,” The New Name of Planning”: http://www.thehindu.com/opinion/lead/niti-aayog-the-new-name-of-planning/article6799483.ece

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[i] When I first arrived at the Planning Commission I was shocked to find no sign of “Social Cost-Benefit analysis” (as against Economic appraisal/cost-benefit analysis), the original justification & Sina-Qua-non of “Project appraisal”. The “models” that were sometimes said to be used in Planning Commission were of US undergraduate level.  In 2000s we did commission 3-4 Indian think tanks to build macro/CGE models suitable for policy analysis, but these were quite separate from five year or annual expenditure allocations, which were done by traditional methods.  

[ii] Arvind Virmani, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. https://docs.google.com/viewer?a=v&pid=sites&srcid=ZGVmYXVsdGRvbWFpbnxkcmFydmluZHZpcm1hbml8Z3g6MjQ4ODc3YWI2ZDcxZmE5NQ .

[iii] Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006.

[iv]  Arvind Virmani, “Size and Role of Government: Quality vs. Quantity of Intervention”, Indian Economic Journal,  Vol. 37, No. 4, April-June 1990; and Virmani(2002) op cit

[v] See, http://dravirmani.blogspot.in/2014/08/bharatiya-vikas-niti-sansthan-bvns.html for more on what will happen to planning and what  “Niti Ayog” may do in future.

Current Economc Situation

Some Answers to Questions posed by Bloomberg on the Current Economic Situation:

Q1: We have rates tightening coming in the US, while ECB and BOJ are easing policies. How do you see these diverging monetary policies impacting the the rupee?

A1:The US$ has been appreciating against all currencies as result of higher growth expectations and expected rise in interest rates relative to Europe, Japan etc.. It has consequently appreciated by around 12% against the index, but only about 5% against the rupee. So the Rupee is quite comfortably placed.

Q2: What's your outlook on the rupee? Where do you see the rupee by the end of Dec. 2015? Also, pls mention the reasons that will be influencing the rupee in 2015?

A2: This depends on the further changes in the USD against the other currencies. However, one is reasonably confident that the USD appreciation against Rupee wont be larger than against the index. Though there is great uncertainty about oil prices, at some point in the next two years they will rise & have some impact on our CAD

Q3: On balance, how do you think the RBI will respond to evolving situation? 

Will it keep the rates high to defend the rupee amid financial markets volatility or due you think it will cut rates going forward to support growth?

A3: I cannot speculate on RBI's response. I believe that the relatively lower depreciation of the Rupee against the dollar, as indicated in A1, and the down trend in Indian inflation (through its effect on real exchange rates), provide additional leeway to cut Indian interest rates.

Q4: What's your outlook on the RBI's monetary policy? Do you think, it should cut rates now since CPI inflation has come down, while growth still remains tepid?

A1: The time for a rate cut arrived several months ago with the dramatic change in inflation trends. Every piece of new inflation data has reinforced my earlier conclusion that it is time to cut rates.

Q5: When do you think the RBI will start cutting rates? What is it that the RBI is waiting for to cut rates?

A5: The RBI seems to have three reasons for not cutting rates last month. A slow downward adjustment in inflation expectations, uncertainty about future inflation shocks and the need to avoid the discomfort of having to raise rates in next year or two after reducing them now. This view was supported by financial market participants who believe in Chicago-Wall street monetarist approach & the IMF. At some point the sharp downtrend in inflation will force them to change their view, resulting in monetary loosening

Q6: What's your outlook on the Indian economy in fiscal year to March 2016? What factors you think will be driving growth?

A6: I had forecast a 1% rise in the growth rate for 2014-15 (over 2013-14: ie 5.7%) with a margin of 0.25% on either side. The delay in loosening monetary policy will likely push growth to the lower end of my range of 5.45% to 5.95%). Growth in 2015-16 is still likely to reach the 6.5% to 7% range that I had given after the June 2014 budget, because of the structural reforms underway and the likely change in macro policy (macro twist) to tighter fiscal policy (lower Revenue deficit) and looser monetary policy (lower repo rates).

Q7: What's your outlook on the government's efforts to reduce the budget deficit? (do you think, it will succeed in containing budget deficit at 4.1% of the GDP in Fy15 and 3.6% in Fy16)?

A7: After the June budget I had said that despite the difficulty of attaining 4.1% FD, the FM would likely have to achieve it to establish credibility. This is still the most likely outcome. I also believe the FM will stick to the targets for next year. There are some voices that are urging a weakening of these targets to stimulate growth through higher investment. In my view this would be a serious mistake. The best way to stimulate investment is to reduce Revenue deficit to zero and use the space created to increase real infrastructure investment within these fiscal deficit targets.

Q8: How do you view the drop in global crude oil prices and how will it impact inflation, budget deficit and the cad in India?

A8: The decline in crude oil prices has clearly helped in reducing inflation, the CAD and oil related subsidies. But we shouldn't forget that it also indicates a lower than projected World growth & and growth of global demand. This is part of the reason for slower recovery of manufacturing sector world wide and in India, which is also reflected in  lower revenue growth.

Other Questions:

Q9: How much of a drag will the World economy be on the Indian Economy.

A9:   There are two aspects of this issue. One is that an analysis of the acceleration in the growth of the Indian economy and the World economy from the early 1990s and subsequently in the early 2000s and the negative impact of the Global financial crisis shows that in per capita terms India's economy slowed by about 3.6% while the World economy slowed by 1.2% (in per capita real growth). Thus at 2.4% or 2/3rd of the deceleration is due to domestic factors and can be reversed.
     Given the preceding boom and the continuing high investment in China the excess capacity in manufacturing and mining continues. This continues to put strong competitive pressure on manufacturing recovery in India and across the World (Ultra globalised sectors). However, there is scope within every sub-sector and industry to improve investment in and output of intermediate quality goods which are less globalised and less subject to global competition.

Q10: Some people have called for an easing of monetary policy, others have called for an easing of fiscal policy to increasing government expenditure on infrastructure. What do you think.

A10: In my view the best macro policy for India at this time is an easing of Monetary policy and a strict adherence to the fiscal deficits targets. In fact Government should go further and reduce the Revenue deficit further to zero, the original FRBM target for revenue deficits: In other words the government should shift its expenditures more sharply from subsidies and consumption/current expenditures to infrastructure investment, while sticking to fiscal deficit targets [ http://dravirmani.blogspot.in/2013/02/macro-pivot-rebalancing-of-indian.html , http://dravirmani.blogspot.in/2013/08/managing-indian-macro-pivot-twist.html ]
   As in the case of Indian States so is the case for different countries- One size does not fit all. What is the best policy for Europe, namely an increase in fiscal deficit through greater expenditure on infrastructure investment, is not the best policy for India. India needs monetary easing as real interest rates have increased sharply during the last 6 months or so because of a sharp decline in trend inflation [  http://www.btvin.com/videos/watch/10117/rajan-called-for-a-%27make-for-india%27-policy-over-%27make-in-india , http://www.youtube.com/watch?v=vL7voeGkMvQ&feature=youtu.be   ]