Former chief statistician Pronab Sen discusses the recent “large” revisions in the national income data by the National Statistical Office, the nature of the current growth slowdown, and the medium to long term prospects of the economy, in an interview with Priyansh Verma and K G Narendranath. He also dwells on the pros and cons of the looming global tariff wars for Indian economy and its vulnerable sectors like agriculture. “Cheap imports (from tariff cuts for the US) could directly threaten sales of domestic agriculture products in urban rather than rural areas. If the Indian farmers are deprived of urban markets, they are going to be in deep trouble,” he says.
Q: Are the revisions in GDP numbers, particularly for FY24, due to additional data being captured? Are we now getting some new data that weren’t available earlier? In this scenario, are the current series of GDP figures in the recent years strictly comparable?
A: The data collected are the same. With data gathered, GDP estimates get revised. As far as FY24 is concerned (for the year, GDP growth print was revised by 100 basis points to 9.2%), the revised number was reflecting the data from unlisted companies. All economists had expected that listed companies, especially the larger ones, had done better than the smaller, unlisted firms, but the data turned out to be contrary to that notion.
Q. The same methodology of publishing GDP data based on listed companies first, then adding unlisted companies’ data was followed previously as well. But the divergence wasn’t so stark. What might have happened this time around?
A: Earlier, we used to get unregistered (unincorporated) company data once in five years. Until the next data came in, NSO was just extrapolating. So, there was a basic stability in data, which have been captured annually since 2021-22, leading to fresh readings.
Q: Is there any other kind of statistical problem with the large revisions?
A: Technically, I don’t see any. But the real question is the revision that has happened goes against the understanding of most economists. The only interpretation is that smaller companies have done much better than the larger ones.
Q: In FY24, the GDP growth was 9.2%, but the private final consumption expenditure (PFCE) grew at just 5.6%. Is such a huge gap acceptable, given that PFCE is a major component of GDP?
A: It is worrying, if I assume that the GDP number has been calculated correctly, because, on the consumption side, we don’t have direct data, but (it is) calculated from the production data. So, what we are seeing is weak consumption, and no great private investment. That is, what’s driving the whole growth process seems to be (the small component of) government expenditure.
When the NSO revised the previous years’ numbers, it also revised the PFCE upwards, quite significantly, but the gap still remained the same. This is something we need to be concerned about. By and large in India, the gap between GDP growth and consumption growth has rarely exceeded more than one-and-a-half percentage points. Now we are talking about 400 basis points (bps). This suggests that there is a serious income distribution problem. The high consumption classes are usually the poor, and their income as a share of GDP has fallen drastically. It suggests the rich are getting richer and the poor are getting poorer.
Q: If that is the case, the ability of consumption to drive growth on a medium- to long-term basis may be undermined…
A: That may be right, but not necessarily the case. There has been a serious income distribution change, and the MSME sector – the largest source of employment after agriculture – has taken a beating. Therefore, the people, who are the poor employees in these enterprises, have lost their jobs and incomes and, therefore, the consumption is down.
Q: The government has been trying to push public capex. But the Centre’s capex has been increased partly at the cost of CPSEs’ and state government’s capex…
A: It has also been at the cost of social spending. They’ve compressed revenue expenditure quite seriously and increased capex.
Q: In the latest Budget, maybe there’s a shift. The government is trying to have a shift to consumption also with big tax cuts for the “middle class.”
A: The tax cut is a bad idea. It will drive some consumption. But two things have happened in the Budget. One is that the fiscal deficit has been reduced by 50 bps. That has a contractionary effect. So, you have a contraction happening on one side, and on the other side, you’re getting a tax break for the middle class, which is expansionary. This means the cut that you have made to all other expenses have been larger than what would have happened if you had not given the tax break.
On a net basis, the consumption boost is negative, in my view. In the Budget, you have cut all social expenditures, including that on health, education and even NREGA. These are methods of putting money in the hands of the poor. So you’ve given to the middle class, there is going to be a boost there. But this is a class who doesn’t spend that money. Yes, they will probably spend 60% or so of the money that they get, and 40% will go into savings. But the people who have suffered from social expenditure cuts will be poorer, which means that they will have to reduce their consumption.
Q: Why have we not seen any increase in the private sector capital spending yet?
A: There’s nothing that the government has done obviously wrong. The classical prescription for low private investment is to increase public capex, which does two things. First, it improves the cost of doing business because your infrastructure becomes better. And second, it boosts demand, particularly from large companies.
Now, these two effects are supposed to lead to a boom in private investment. The government has done that for three years, but the private capex has just refused to move. I feel it’s a crisis of confidence, rather than any objective measure (of demand or potential rate of return). So, both private investment and private consumption are being affected by a crisis of confidence.
Q: The decline in growth we see in the current year is compared to last year. What percentage of this is cyclical, and how much of it is structural?
A: I have been saying that the initial estimates are based only on listed company data, and the listed companies are already slowing down. So, no big surprise in this growth slowdown. However, what the revisions are suggesting is that the unlisted companies are doing much better. And it would well be the case that as the listed company’s performance drops, the unlisted company’s performance goes up even further. In that case, you might see a very large revision happening, for the same reason.
Q: In the coming years, how do you see growth, and in what range?
A: In the medium term, if we average a growth of about 6.5%, we are doing well. That’s our potential growth rate as of now.
Q: Is the computation of GDP deflator a reason for higher revisions in recent years?
A: Yes. There was an extended period where WPI was in negative territory, but the CPI was positive, at about 5.5-6%. Mainly in 2024, WPI was seriously negative. When we measure GDP, we always measure it in current prices and then we deflate. In the situation of negative prices, real growth will be higher than nominal. But now we are out of it.
Q: There are talks of a double deflation method and the producer price index (PPI). How do you view that?
A: We have been trying to do a producer price index since 2002, but still haven’t succeeded. The reason is that the company, say producers, are not sharing the data. The WPI and CPI are collected from the market. In PPI, you’ve to get it from the books of accounts of companies. The firms, however, have been resolutely refusing to share it. They say pricing is part of their strategy, which they don’t want to disclose.
Practically, every company for the last 20 years has refused to share that data. You can get it, but you have to be tough about it. Then you have to impose the Collection of Statistics Act, and say if you don’t give us this data, we’ll impose fines on you, and if you still don’t, we’ll put your CEO in jail. The legal provisions are present, but haven’t been used till now.
Q: Some reports say that the rural consumption is now looking relatively better, and the urban sector is relatively worse off. But the demand for NREGA is still very high, and the demand is apparently not being fully met. How do you see the rural demand now, in the light of assorted high frequency data?
A: Up to now, rural demand has been consistent with the agricultural growth rate, which meant, in effect, that rural non-agriculture, which accounts for about 60% of rural incomes, wasn’t doing very well. Now that we are seeing rural demand picking up. It could be that small rural enterprises are starting to come back. One of the things about NREGA is that you had this return migration in 2020-21. When people went back to villages, they had no occupation. The land was already being tilled by somebody. This is why, after more than 30 years, we saw an increase in agriculture workers. That’s a disturbing fact.
Q: Those who returned (to the rural areas), are they still there, or are back to urban centres?
A: We don’t know. In the absence of the census, we don’t know. The census is so critical, because a lot has happened during the COVID period. We need to have the census as quickly as possible.
Q: If you cut GST rates, the Finance Minister is talking about reduction in rates. I think it will boost consumption more than Income tax cuts.
A: It will, but now you have already given I-T cuts already. Can you now afford a GST cut? To my mind, it was a trade off between both.
Q: As such the GST revenue as a % of GDP, it has just reached pre-GST level…
A: Yes. Just about.
Q: Why has the census not yet begun?
A: The Central government has to start the exercise by calling all the states, give directions for beginning the mapping exercise, and then provide the finances. I don’t know the exact reason for the delay.
Q: Could delimitation be the reason for the delay? For it, data from census conducted after 2026 need to be used…
A: It could be. But at least, one needs to start the process. The census has to be done within a 20-day period.
Q: On the Finance Commission, there has been reports that Centre may seek a cut or at least status quo in states’ shares of taxes. Many states, however, feel that they don’t get adequate share of taxes..
A: There should be a joint discussion on it. But technically, it is the decision of the finance commission.
Q: A global tariff war seems impending. Is it also an opportunity for India?
A: We need to ask ourselves, how important is US as a market for India. If the US is really important, as it is for European Union (EU), Mexico or Canada, they have to look for alternative trade relationships. That’s an opportunity.
On the other hand, if US imports decline significantly, then countries will essentially have to enter into a fight for the rest of the global market put together. Then, the world trading order outside of the US is going to become far more competitive. It will subsequently depend on the companies…how efficiently they can compete.
Q: Many Indian industries, such as gems & jewellery, pharmaceuticals, electronics, are asking the Indian government to agree to zero-for-zero tariff policy. They are not as concerned as people thought earlier about lower duties affecting them. They are not seeking protection as much as was anticipated before.
A: These are the sectors where we export a lot more than we import. In fact, we don’t import at all. For gems & jewellery, we only import raw gems, and pharma imports are all from China. But for our pharma industry, the US is a major market. Therefore, for them, getting access to the US market is important. They know the zero-for-zero tariff policy is not going to affect them, as there is no US pharma company that can produce their (Indian company’s) product at the same cost.
Q: This issue is only for US, not on an MFN basis for everybody…
A: Yes. That’s going to cause us problems. We have always tried to maintain the MFN, we don’t violate the MFN. But the US is forcing us to do that.
Q: Should we agree to all these concessions they are asking for, which are a lot more than tariffs (patent protection, government procurement, defence purchases etc)…we should agree to most of it or retaliate.
A: I believe we need to be very clear about our own interests. In the case of defence purchases, they are in any case government-to-government and this has changed over time. First we used to be totally dependent on Russia, now we have diversified. The commercial aspect of this is not so clear. Strategic issues are also involved in these aspects (defence procurement).
The real question, however, is: are we willing to let the world completely scrap the WTO mechanism, which Donald Trump is trying to force. Trump is trying to force that you have bilateral deals with everyone. Then it’s going to be mercantilism at its worst.
Our strategy should be balanced. We should certainly be wary of reducing tariffs on the sectors that need protection, such as agricultural goods.
Q: Noted agriculture economists are saying most exports of farm goods are not vulnerable to tariff cuts.
A: There may not be a need to worry about farm exports. The main thing is, imports directly threaten sales of domestic agriculture products in urban rather than rural areas. If the farmers are deprived of urban markets, they are going to be in deep trouble. The US’s tariffs are not as important for us. But for us to reduce out tariffs would be very dangerous. (END)