But Do These Num­bers Add Up?

The Economic Times - - The Edit Page Chock-a-block - Mythili Bhus­nur­math

Now that the brouhaha over Bud­get 2017 is all but over, all eyes shift to Ur­jit Pa­tel and the Re­serve Bank of In­dia’s (RBI) mon­e­tary pol­icy an­nounce­ment this Wed­nes­day. The state­ment fol­low­ing the Bud­get is al­ways of spe­cial in­ter­est as it is read as a sig­nal of whether the gov­ern­ment and RBI see eye to eye on broad macroe­co­nomic as­sump­tions un­der­ly­ing Bud­get num­bers.

Much, there­fore, de­pends on the cred­i­bil­ity of the Bud­get num­bers. Fi­nance min­is­ter Arun Jait­ley has ap­par­ently been fairly re­strained: de­vi­a­tion from the fis­cal deficit tar­get is rel­a­tively small at 0.2 per­cent­age points. So should the RBI sup­ple­ment his ef­forts with a mon­e­tary stim­u­lus? In lay­man terms, should the Mon­e­tary Pol­icy Com­mit­tee (MPC) cut in­ter­est rates? Or should it take the view that mon­e­tary pol­icy is al­ready easy and opt, in­stead, to wait for greater clar­ity?

There are no easy an­swers. Not only be­cause most banks have al­ready re­duced in­ter­est rates by more than the re­duc­tion in the RBI’s repo rate since Jan­uary 2015. But, more im­por­tantly, be­cause the fis­cal arith­metic un­der­ly­ing Bud­get 2017 is not en­tirely cred­i­ble. Con­sider the num­bers on which the fi­nance min­is­ter has pulled off the im­pos­si­ble. He ex­ceeded his rev­enue tar­gets and over­shot pro­jected ex­pen­di­ture, and yet man­aged to ad­here to the fis­cal deficit tar­get of 3.5% of GDP. All in a year when eco­nomic ac­tiv­ity was ma­jorly dis­rupted, post-Novem­ber 8, 2016!

Let’s start with GDP es­ti­mates for fis­cal 2017-18. These have been pro­jected at .₹ 168.47 lakh crore, as­sum­ing 11.75% growth over re­vised es­ti­mates for 2016-17. But wait a minute. The Cen­tral Sta­tis­ti­cal Or­gan­i­sa­tion (CSO), re­spon­si­ble for pro­vid­ing GDP es­ti­mates, has not put out re­vised es­ti­mates for 2016-17. All we have from the CSO are first ad­vance es­ti­mates for 2016-17 GDP, pub­lished on Jan­uary 6, 2016.

So, from where has the fi­nance min­is­ter got re­vised es­ti­mates for 201617? “The Eco­nomic Sur­vey,” said se­nior gov­ern­ment of­fi­cials, in a postBud­get tele­vi­sion in­ter­ac­tion on ET Now. But here’s the thing. Mea­sure­ment of GDP is a com­plex sta­tis­ti­cal ex­er­cise. That is why it is en­trusted to a spe­cialised, tech­ni­cal body in ev­ery coun­try, in­clud­ing In­dia.

This year, since the pre­sen­ta­tion of the Bud­get was ad­vanced by a month, the CSO also pub­lished its GDP es­ti­mates ear­lier, on Jan­uary 6, 2017. How­ever, it had a caveat: de­mon­eti­sa­tion had not been fac­tored in as it did not have enough data to make a proper es­ti­mate.

So what is the sanc­tity of 2016-17 GDP es­ti­mates, which form the ba­sis for 2017-18 GDP pro­jec­tions and, flow­ing from that, for tax col­lec­tions, ex­pen­di­ture and so on? We do not know. The Eco­nomic Sur­vey made a brave at­tempt to fac­tor in the de­mon­eti­sa­tion im­pact. But can we ac­cept its GDP es­ti­mates with­out ques­tion?

What we do know is that if we take the Sur­vey’s nom­i­nal GDP es­ti­mates for 2016-17 and the CSO’s first re­vised es­ti­mates for 2015-16, we get a nom­i­nal GDP growth of just 10.2% for 2016-17, not 11%, as as­sumed in the Bud­get. Tak­ing the CSO’s im­plicit GDP de­fla­tor of 1.25 for the year, the real GDP growth in 2016-17 falls to 6.2%, well be­low most es­ti­mates.

That is not all. Re­vised es­ti­mates, for cor­po­ra­tion tax and per­sonal in­come tax for 2016-17, are ex­actly the same as Bud­get es­ti­mates. Why? Be­cause, hold your breath, gov­ern­ment of­fi­cials say they don’t have re­li­able num­bers for di­rect tax col­lec­tions as yet. So, Bud­get es­ti­mates have sim­ply been re­peated as re­vised esti- mates. Yet, it is based on such num­bers that we are com­mend­ing the fi­nance min­is­ter for stick­ing to his fis­cal deficit tar­get of 3.5%. And pro­vide the ba­sis for pro­jec­tions in Bud­get 2017.

There is sim­i­lar un­ease with in­di­rect tax col­lec­tion num­bers, given un­cer­tain­ties over the goods and ser­vices tax (GST). So, here again, es­ti­mates must be taken with a pinch of salt, es­pe­cially when we jux­ta­pose a slow­ing econ­omy with the short-term eco­nomic dis­rup­tion likely on ac­count of GST. Like­wise, go­ing by the track record of suc­ces­sive gov­ern­ments, the dis­in­vest­ment tar­get of .₹ 72,500 crore for 2017-18 seems wish­ful think­ing.

On the ex­pen­di­ture side too, some num­bers do not carry con­vic­tion. Thus, de­spite the FM’s talk of in­creased cap­i­tal ex­pen­di­ture, it is up only about 11%, not 25% (this is pos­si­bly on ac­count of re­clas­si­fi­ca­tion).

So, how is the MPC to read the sig­nals from Bud­get 2017? Agreed, it is a Her­culean task to draw up a cred­i­ble Bud­get for an econ­omy of the size and com­plex­ity of In­dia. Also, doubts about fis­cal arith­metic are not new.

But when there is the ad­di­tional hand­i­cap of lack of cred­i­ble data — due to early pre­sen­ta­tion of the Bud­get, how­ever de­sir­able that might be — com­bined with eco­nomic dis­rup­tion, the fis­cal arith­metic be­comes more sus­pect. If the MPC was hop­ing the Bud­get would help it see through the smoke and mir­rors of de­mon­eti­sa­tion, it is in for a dis­ap­point­ment.

‘Never make a fore­cast, es­pe­cially about the fu­ture’, quipped Yogi Berra, the base­ball coach. Pol­i­cy­mak­ers don’t have that lux­ury. They have to make that leap of faith. But when macro num­bers lack a sound un­der­pin­ning, as in Bud­get 2017, the out­come could be costly. In such a sce­nario, the MPC is best ad­vised to play safe for now and wait for greater clar­ity.

In search of some clar­ity

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