'Today, there are doubts about Indian data': Parakala Prabhakar

 

Acchhe Din: Real wages in the formal sector fell by 10% between 2012-2022

 

The Economist examines India's Economic Performance

 From The Economist

In the second week of 2024 business leaders descended on Gujarat, the home state of Narendra Modi, India’s prime minister. The occasion was the Vibrant Gujarat Global Summit, one of many gabfests at which India has courted global investors. “At a time when the world is surrounded by many uncertainties, India has emerged as a new ray of hope,” boasted Mr Modi at the event.

He is right. Although global growth is expected to slow from 2.6% last year to 2.4% in 2024, India appears to be booming. Its economy grew by 7.6% in the 12 months to the third quarter of 2023, beating nearly every forecast. Most economists expect an annual growth rate of 6% or more for the rest of this decade. Investors are seized by optimism.

The timing is good for Mr Modi. In April some 900m Indians will be eligible to vote in the largest election in world history. A big reason Mr Modi, who has been in office since 2014, is likely to win a third term is that many Indians think him a more competent manager of the world’s fifth-largest economy than they do any other candidate. Are they right?

To assess Mr Modi’s record The Economist has analysed India’s economic performance and the success of his biggest reforms. In many respects the picture is muddy—and not helped by sparse and poorly kept official data. Growth has outpaced that of most emerging economies, but India’s labour market remains weak and private-sector investment has disappointed. But that may be changing. Aided by Mr Modi’s reforms, India may be on the cusp of an investment boom that would pay off for years.

The headline growth figures reveal surprisingly little. India’s gdp per person, after adjusting for purchasing power, has grown at an average pace of 4.3% per year during Mr Modi’s decade in power. That is lower than the 6.2% achieved under Manmohan Singh, his predecessor, who also served for ten years.

image: the economist

But this slowdown was not Mr Modi’s doing: much of it is down to the bad hand he inherited. In the 2010s an infrastructure boom started to go sour. India faced what Arvind Subramanian, later a government adviser, has called a twin balance-sheet crisis, one that struck both banks and infrastructure firms. They were left loaded with bad debt, crimping investment for years afterwards. Mr Modi also took office at a time when global growth had slowed, scarred by the financial crisis of 2007-09. Then came the covid-19 pandemic. The difficult conditions meant average growth among 20 other large lower- and middle-income economies fell from 3.2% during Mr Singh’s time in office to 1.6% during Mr Modi’s. Compared with this group, India has continued to outperform (see chart 1).

Against such a turbulent backdrop, it is better to assess Mr Modi’s record by considering his stated economic objectives: to formalise the economy, improve the ease of doing business and boost manufacturing. On the first two, he has made progress. On the third, his results have so far been poor.

India’s economy has certainly become more formal under Mr Modi, albeit at a high cost. The idea has been to draw activity out of the shadow economy, which is dominated by small and inefficient firms that do not pay tax, and into the formal sphere of large, productive companies.

Mr Modi’s most controversial policy on this front has been demonetisation. In 2016 he banned the use of two large-value banknotes, accounting for 86% of rupees in circulation—surprising many even within his government. The stated aim was to render worthless the ill-gotten gains of the corrupt. But almost all the cash made its way into the banking system, suggesting that crooks had already gone cashless or laundered their money. Instead, the informal economy was crushed. Household investment and credit plunged, and growth was probably hurt. In private, even Mr Modi’s supporters in business do not mince words. “It was a disaster,” says one boss.

Demonetisation may have accelerated India’s digitisation nonetheless. The country’s digital public infrastructure now includes a universal identity scheme, a national payments system and a personal-data management system for things like tax documents. It was conceived by Mr Singh’s government, but much of it has been built under Mr Modi, who has shown the capacity of the Indian state to get big projects done. Most retail payments in cities are now digital, and most welfare transfers seamless, because Mr Modi gave almost all households bank accounts.

Those reforms made it easier for Mr Modi to ameliorate the poverty resulting from India’s disappointing job-creation record. Fearing that stubbornly low employment would stop living standards for the poorest from improving, the government now doles out welfare payments worth some 3% of gdp per year. Hundreds of government programmes send money directly to the bank accounts of the poor.

It is a big improvement on the old system, in which most welfare was distributed physically and, owing to corruption, often failed to reach its intended recipients. The poverty rate (the proportion of people living on less than $2.15 a day), has fallen from 19% in 2015 to 12% in 2021, according to the World Bank.

Digitisation has probably also drawn more economic activity into the formal sector. So has Mr Modi’s other signature economic policy: a national goods and services tax (gst), passed in 2017, which knitted together a patchwork of state levies across the country. The combination of homogenous payments and tax systems has brought India closer to a national single market than ever.

That has made doing business easier—Mr Modi’s second objective. gst has been a “game-changer”, says B. Santhanam, the regional boss of Saint-Gobain, a large French manufacturer with big investments in the southern state of Tamil Nadu. “The prime minister gets it,” adds another seasoned manufacturing executive, referring to the need to cut red tape. The government has also put serious money into physical infrastructure, such as roads and bridges. Public investment surged from around 3.5% of gdp in 2019 to nearly 4.5% in 2022 and 2023.

The results are now materialising. Mr Subramanian recently wrote that, as a share of gdp, in 2023 net revenues from the new tax regime exceeded those of the old system. This happened even as tax rates on many items fell. That more money is coming in despite lower rates suggests that the economy really is formalising.

Yet Mr Modi is not satisfied with merely formalising the economy. His third objective has been to industrialise it. In 2020 the government launched a subsidy scheme worth $26bn (1% of gdp) for products made in India. In 2021 it pledged $10bn for semiconductor companies to build plants domestically. One boss notes that Mr Modi personally takes the trouble to convince executives to invest, often in industries where they face little competition and so otherwise might not.

image: the economist

Some incentives could help new industries find their feet and show foreign bosses that India is open for business. In September Foxconn, Apple’s main supplier, said it would double its investments in India over the coming year. It currently makes some 10% of its iPhones there. Also in 2023 Micron, a chipmaker, began work on a $2.75bn plant in Gujarat that is expected to create some 5,000 jobs directly and 15,000 indirectly.

So far, however, these projects are too small to be economically significant. The value of manufactured exports as a share of gdp has stagnated at 5% over the past decade, and manufacturing’s share of the economy has fallen from about 18% under the previous government to 16%. And industrial policy is expensive. The government will bear 70% of the cost of the Micron plant—meaning it will pay nearly $100,000 per job. Tariffs are ticking up, on average, raising the cost of foreign inputs.

image: the economist

So what matters more: Mr Modi’s failures or his successes? As well as economic growth, it is worth looking at private-sector investment. It has been sluggish during Mr Modi’s time in office (see chart 2). But a boom may be coming. A recent report by Axis Bank, one of India’s largest lenders, argues that the private-investment cycle is likely to turn, thanks to healthy bank and corporate balance-sheets. Announcements of new investment projects by private corporations soared past $200bn in 2023, according to the Centre for Monitoring Indian Economy, a think-tank. That is the highest in a decade, and up 150% in nominal terms since 2019.

Although higher interest rates have sapped foreign direct investment in the past year, firms’ reported intentions to invest in India remain strong, as they seek to “de-risk” their exposure to China. There is some chance, then, that Mr Modi’s reforms will kick growth up a gear. If so, he will have earned his reputation as a successful economic manager.

The consequences of Mr Modi’s policies will take years to be felt in full. Just as an investment boom could vindicate his approach, his strategy of using welfare payments as a substitute for job creation could prove unsustainable. A failure to build local governments’ capacity to provide basic public services, such as education, may hinder growth. Subhash Chandra Garg, a former finance secretary under Mr Modi, worries that the government is too keen on “subsidies” and “freebies”, and that its “commitment to real reforms is no longer that strong.” And yet for all that, many Indians will go to the polls feeling cautiously optimistic about the economic changes that their prime minister has wrought.

Generative AI will go mainstream in 2024

 

Data-savvy firms will benefit first predicts The Economist

image: mariano pascual

Nov 13th 2023

By Guy Scriven

Listen to this story.

 Enjoy more audio and podcasts on iOS or Android.

When new technologies emerge they benefit different groups at different times. Generative artificial intelligence (ai) first helped software developers, who could use GitHub Copilot, a code-writing ai assistant, from 2021. The next year came other tools, such as Chatgpt and dall-e 2, which let all manner of consumers instantly produce words and pictures.

In 2023 tech giants gained, as investors grew more excited about the prospects of generative ai. An equally weighted share-price index of Alphabet, Amazon, Apple, Meta, Microsoft and Nvidia grew by nearly 80% (see chart). Tech firms benefited because they supply either the ai models themselves, or the infrastructure that powers and delivers them.

image: the economist

In 2024 the big beneficiaries will be companies outside the technology sector, as they adopt ai in earnest with the aim of cutting costs and boosting productivity. There are three reasons to expect enterprise adoption to take off.

First, large companies spent much of 2023 experimenting with generative ai. Plenty of firms are using it to write the first drafts of documents, from legal contracts to marketing material. JPMorgan Chase, a bank, used the technology to analyse Federal Reserve meetings to try to glean insights for its trading desk.

As the experimental phase winds down, firms are planning to deploy generative ai on a larger scale. That could mean using it to summarise recordings of meetings or supercharging research and development. A survey by kpmg, an audit firm, found that four-fifths of firms said they planned to increase their investment in it by over 50% by the middle of 2024.

Second, more ai products will hit the market. In late 2023 Microsoft rolled out an ai chatbot to assist users of its productivity software, such as Word and Excel. It launched the same thing for its Windows operating system. Google will follow suit, injecting ai into Google Docs and Sheets. Startups will pile in, too. In 2023 venture-capital investors poured over $36bn into generative ai, more than twice as much as in 2022.

The third reason is talent. ai gurus are still in high demand. PredictLeads, a research firm, says about two-thirds of s&p 500 firms have posted job adverts mentioning ai. For those companies, 5% of adverts now mention the technology, up from an average of 2.5% over the past three years. But the market is easing. A survey by McKinsey, a consultancy, found that in 2023 firms said it was getting easier to hire for ai-related roles.

Which firms will be the early adopters? Smaller ones will probably take the lead. That is what happened in previous waves of technology such as smartphones and the cloud. Tiddlers are usually more nimble and see technology as a way to gain an edge over bigger fish.

Among larger companies, data-centric firms, like those in health care and financial services, will be able to move fastest. That is because poor data management is a big risk for deploying ai. Managers worry about valuable data leaking out through ai tools. Firms without solid data management may have to reorganise their systems before it is feasible to deploy generative ai. Using the technology can feel like science fiction, but getting it to work safely is a much more humdrum affair. 

A level Economics: India's Economic Data could be fiction

 T C A Sharad Raghavan in The Print

The next time somebody, even the Prime Minister, boasts about India being the fastest-growing economy or that it is the fifth largest in the world, ask them to prove it. Even Modi will not be able to. The reams of government data that will be thrown at you will almost all be incorrect, and the analysis done on them will be guesswork at best. The reason for this is not some convoluted statistical reasoning. It’s much simpler: the data is outdated and largely meaningless. The most recent actual data for the Indian economy we have is about 12 years old.

Amrit Kaal may be the target, but we don’t even know our starting point.

The old…

Let’s take something as conceptually simple as per capita gross domestic product (GDP)—basically the total output of the country divided by the population. It serves as a broad proxy to denote the wealth of an average Indian. Should be simple enough to calculate, right? Let’s start with the numerator, which is the GDP figure.

The agriculture sector probably has the most up-to-date data when it comes to the overall GDP measure, and even that comes with a delay of about two years. The Directorate of Economics and Statistics in the Ministry of Agriculture and Farmers Welfare compiles the data on India’s agriculture output for any given year, and releases four advance estimates, before the final figures come out about two years after the collection.

Such a ‘short’ delay of just two years might have been okay if agriculture formed a larger part of our GDP. But with a share of less than 20 per cent, accuracy of agricultural data, while important, doesn’t materially improve the quality of the overall GDP number.

From here, it just becomes worse.

The manufacturing sector is divided into the organised sector and the unorganised sector. Data for the organised sector used to come from the Annual Survey of Industries—but with a lag. Now it comes from the much more up-to-date MCA-21 database compiled by the Ministry of Corporate Affairs. That’s not the problem here. The unorganised sector is.

The unorganised or informal sector, by definition, is difficult to quantify because there are no formal metrics through which such an audit can take place. If you could effectively measure it, it would not be ‘unorganised’ or ‘informal’. Rather, it is ‘unorganised’ because you can’t measure it.

Policymakers have gotten around this problem by periodically doing a nation-wide survey. Using the findings of the survey of the informal sector, the statisticians in the government then arrive at a ratio that can neatly be multiplied by the size of the formal sector, to arrive at an approximation of the size of the informal economy.

So, let’s say the formal sector is Rs 100 in size, and the ratio they have arrived at is 1.25. The informal sector would then be estimated at Rs 125 (Rs 100 x 1.25), which then gives you the total economic output of the sectors being measured—Rs 225 (Rs 100 + 125).

Ideally, this would work well. However, at a time when the latest survey of the informal sector—the Unincorporated Enterprises Survey—is from about 13 years ago, well before demonetisation, GST, and Covid, we don’t really know what shape the informal sector is in right now.

Then we come to the services. Trade, hotels, restaurants, real estate, all have significant contributions to GDP and sizeable informal segments, all of which are based on surveys conducted in 2011-12 or thereabouts.

Just think about the sea change the Indian economy has witnessed since 2011—both the positive and the negative. Inequality has widened, but access to basic essentials has improved. Demonetisation wiped out 86 per cent of the cash in the system overnight. The indirect tax system was overhauled with GST. A pandemic disrupted the economy like never before.

And then there are the myriad smaller changes that over time become big. The movie theatre industry has changed so dramatically. An entire generation of entrepreneurs are minting money by creating two-minute videos, forget any sort of asset creation. None of these or the million other changes to the Indian economy over the last decade are being captured in the data.

So that’s the numerator of the per capita GDP formula—almost every aspect of it is outdated. The denominator is the population of India, measured by the Census of India. When was the latest one? You guessed it, 12 years ago! 

…and the uncaptured

So, if the GDP number as well as the population size are both more than a decade old, then when somebody talks about the size of the economy or per capita income, what are they talking about? It’s not the present, for sure.

Our data issues don’t end there. The other big number on everybody’s mind is inflation. As this analysis shows, the Consumer Price Index—which is what the Reserve Bank of India uses to measure inflation—falls woefully short of truly measuring the impact of rising prices on the people. The weightage for food is too high, while that of fuel and services such as health, education, and transport and communication are too low.

So, you have a situation where the overall inflation rate gets affected by a change in the price of wheat, even though 80 crore Indians currently get it for free. Or you have a situation where fuel prices shoot up in response to global oil prices, but the overall inflation rate barely registers it. And, while the middle class increasingly prefers private hospitals and private schools (don’t forget tuition classes), this increased spending on health and education is not getting captured.

In fact, with the latest usable Household Consumption Expenditure Survey being only available for the year 2011-12, we actually have only a vague idea about how people are spending their money and how much they are earning.

It’s fine for developed countries like the US to not update their CPI for around 40 years—though even there it might be time for a revision—because the rate of change of these basic economic indicators is much lower there than in an emerging economy like India. Here, a decade is a long time, and a lot can change during it.

It’s not just these, though. Several lesser-known but key surveys that underpin the very basic estimates we have of the economy haven’t been updated in years. The Economic Census is nine years old, the employment survey is 12 years old, as is the base year of the Index of Industrial Production. The input-output tables, critical to measuring the relationship between the production and use of various items in the economy, are 15 years too old.

The government can say all it wants about Amrit Kaal arriving and India becoming a developed nation by 2047, but if it wants to seriously achieve this trajectory, it is first going to have to establish where we stand now.