There will be volatility in economic data; that’s not necessarily an error, says CEA
Krishnamurthy Subramanian is easing into the post of Chief Economic Adviser in the
Finance Ministry. “What I have been quite amazed at is the number of touch points there are for policy-making in our democracy. For any policy change to happen, even at the highest level, the persuasion has to happen actually with different nodal points…Also it is very important to understand that it is volatility, and not necessarily bias,” he says. BusinessLine caught up with him to get a sense of how the CEA, about 45 days into his new job, sees the nation’s data challenge, and where India stands in the emerging economy space. Excerpts:
There is a lot of debate on data. As an economist how do you see the situation?
Remember there is very little academic framework to be able to understand the impact of an activity such as demonetisation and GST. As a result, academically there will be research for a long time to come because we will try to understand the implications. Till then there will be volatility. But volatility is not necessarily an error.
For instance, take the way value-added is measured in telecom. Earlier, what was being used was the number of subscribers; now it is the usage. If you don’t use the phone much, you don’t add much to the economic activity.
What about the political overtones — the role of NITI Aayog and the timing of the back series data?
I would maintain that volatility is not bias. Also, when you are trying to build the plane, some parts you wish for may be ready actually but will (still) take some time. Therefore, it is the process of actually trying to build those parts (that counts), rather than to say — I choose to fit this part now at this point of time.
For instance, we are using financial statements instead of IIP. As somebody who has taught cor- porate finance in a business school, I un- derstand that financial statements are much better than IIP num- bers — not to say that all finan- cial statements are completely kosher or great, but at least there are validations happening. An auditor certifies it, there is an audit committee of the board to sign on it, there are several checks and balances.
The way I look at it, there are proxies which are definitely used to capture activity. If demonetisation and GST had not happened, the same series would not have had as much volatility.
OThere is criticism about growth without jobs. Your thoughts…
This phenomenon is happening in a lot of countries. We believe if there is economic growth, there should be job creation. But in many countries that premise has not been true because if we look at the production function for firms, you have labour and capital. Growth can also happen from labour, capital and productivity — total factor productivity. Growth can come from any of these three dimensions.
You can have substitution of labour by capital, which is what has been happening a lot. There are also jobs that are actually reducing because of capital substituting labour. A re-configuration of jobs is happening. But overall the number of jobs is not expanding much. So one has to open the hood and start looking at re-configuration of jobs — where jobs are actually increasing and where they are decreasing.
Is the income support scheme a precursor to the Universal Basic Income Scheme?
The first word in Universal Basic Income Scheme is universal, while this scheme is targeted at farmers. So it is a case of apples and oranges.
As far as the economic rationale of this scheme is concerned, I look at it like this. While approaching the Budget, there was a lot of debate on alternatives to debt waivers. As an economist, I actually think it’s a bad idea. A recent paper looking at the UPA’s debt waiver scheme has actually split the beneficiaries between in-distress and notin-distress. It was found that a large proportion of borrowers who got waivers were not in distress. If actually you look at yields then crop production until 2008 was actually rising. As a result, the benefit of waiver was cornered by those who did not deserve it.
When a non-distress borrower gets a waiver, it creates significant moral hazard and leads to deterioration in the loan accounts. Despite assurances that the government gives, PSBs will be wary. It is actually damaging to the farmer.
About minimum support price (MSP)...I will give you a glimpse of the phenomenon that prevailed till 2014, when rice and wheat MSP was increased significantly that led to very high production and surplus. Economically, MSP makes sense because at the fundamental level, in agriculture, risk return trade-off is very bad — low return and high risk. MSP reduces the risk significantly.
If a farmer has a crop supported by MSP, he will invest heavily in that crop and as a result will under-invest in crops not supported by MSP. So, in some sense, MSPs affect the cropping pattern.
If you give cash transfer the decision about what to grow and what not to grow is made by the farmers. You are not influencing the crop pattern.
People have talked about whether this amount is adequate or not. When reading numbers, we have to be careful. A NITI Aayog report on doubling farm income says in 2015-16, in real terms, the average income was ₹45,000 crore. Average has been calculated on a base comprising big, small and marginal.
As the proposed scheme is towards small and marginal farmers, the right comparison is to look at average annual income of small and marginal farmers and if you make some reasonable estimation, about ₹35,000 would be the average annual income of small and marginal farmers.
“The first word in ‘Universal Basic Income Scheme’ is universal, while this (income support) scheme is targeted at farmers. It is a case of apples and oranges.”