[Editorial Analysis] A self vigilance model for the Indian economy

Mains Paper 3 : Economy

Prelims level : Self vigilance model

Mains level : Highlights of the Self vigilance model

Context

• Forecasts by global agencies such as IMF make it clear there’s no room for complacency.

• Even if India ignores the Fund’s advice on reforms, its data concerns could yet be addressed.

Pointing towards growth

• The latest cuts in India’s growth forecast by international agencies should remind policymakers that headwinds against the economy are on the rise.

• The World Bank and Asian Development Bank have slashed their forecasts of the country’s growth in gross domestic product (GDP) this year to 7.2%, while the International Monetary Fund (IMF) has made a prediction of 7.3%.

• This pace is higher than projections for all other major economies, so one may wonder why anyone should worry at all.

• However, a look at the growth trend in 2018 shows that the picture is far from rosy.

• Official Indian GDP growth dropped from 8.2% in the three months through June to 6.6% in the quarter ending 31 December and is expected to slide further to about 6% in the first quarter of 2019.

• Other economies are also slowing as the world heads for a slump. As IMF chief economist Gita Gopinath noted: “This is a delicate moment.”

• In all this, the message for India is clear: we must get our act together before the economy takes a turn from bad to worse.

Significant development in recent years

• While India has initiated some significant reforms in recent years, their implementation has left a lot to be desired.

• After years of delay, for instance, the government rolled out the Goods and Services Tax (GST) in mid-2017, but its structure remains much too complex, which defeats the purpose of simplifying taxation.

• Plus, GST compliance is too difficult for many assessees and its input-credit system lacks clarity.

• As for loan recovery, bankruptcy process reforms now seem rather too clumsily executed. Some good work has been done on cleaning up the balance sheets of state-run banks, but issues of their governance have been left unaddressed.

• The monetary policy framework of the central bank has been a rare success, even if it hasn’t fully been tested on inflation yet.

• The IMF, on its part, advocates reducing public debt, easier hire-and-fire rules to incentivize job creation, and land reforms to speed up infrastructure development.

• Under the political circumstances, however, the prospects for such an agenda look bleak.

India’s data credibility

• After Raghuram Rajan, now IMF’s Gopinath seems to have called India’s GDP data into question, asking for “transparent communication” on its calculation and pointing out that decision-makers across the world are watching our economy closely.

• The 2015 overhaul of the computation was aimed at aligning it with international best practices of measuring value addition, but an array of other indicators have signalled a weaker economy than official GDP numbers suggest.

• In an interview with a television channel, Gopinath drew attention to the “deflator” being used by statisticians to arrive at real growth.

• This is the figure by which the nominal growth rate is lopped off to account for price inflation.

• If the deflator that is applied does not properly reflect actual price changes in an economy, then it could deliver a mis-approximation of reality.

Conclusion

• It’s about time, then, that the details of how the deflator has been calculated are disclosed for independent analysis.

• Perhaps the government could appoint its own panel of well-reputed statisticians and economists from around the world to crunch the numbers and validate the results.

• Such openness would help quell criticism of the 2015 shiftover. GDP data is the bedrock of sound policymaking.

• It is a vital input for economic management. Poor quality data would result in ill-informed decisions on what ails the economy.

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Prelims Questions:

Q.1) Which among the following accounts for highest expenditure of the Union Government?

(a) Interest Payments

(b) Defence

(c) Subsidies

(d) Centrally Sponsored Schemes

Correct Answer: A

Mains Questions:

Q.1) To what extent the self vigilance model is required for the Indian economy.

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