NATIONAL ACCOUNTING AND ESTIMATION

GDP ESTIMATION

GDP stands for gross domestic product, which represents the total monetary value, or market value, of finished goods and services produced within a country during a period, typically one year or quarter. In this sense, it’s a measurement of domestic production and can be used to measure a country’s economic health.

Types of GDP

• Nominal: Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure.
• Real: Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time.

Importance of GDP Measurement

1. Tracks Economic Changes: GDP is an important measurement for economists and investors because it tracks changes in the size of the entire economy.
   • Example: If the number is growing, then the economy has become more productive. If the number is shrinking, then the economy has become less productive.
2. Key Economic Factors: GDP reports provide insights into the factors driving economic growth or holding it back.
   • Example: When real GDP is growing strongly, employment is likely to be increasing as companies hire more workers for their factories and people have more money in their pockets.
3. Investor Sentiment: Economic health as measured by changes in the GDP matters a lot for the prices of financial assets. Because stronger economic growth tends to translate into higher corporate profits and investor risk appetite.
   • Example: An investor interested in emerging markets might use GDP to understand which countries are growing at the fastest rates and, therefore, might provide the greatest return on investment.
4. Business Sentiment: An organization or firm looking to expand into new markets might use GDP to evaluate which markets would prove healthiest.
5. Political Impact: A politician or policymaker might use GDP to understand how policies have impacted the economy.
6. Consolidation of traditional economic indicators: Based on empirical analysis, the classical economists link higher GDP growth with higher individual satisfaction as it represents increasing satisfaction (utility), higher jobs etc.

Drawbacks

1. Substantial Issues

• Excludes underground economy: GDP relies on official data, so it does not take into account the extent of the underground economy, which can be significant in some nations.
  • Example: Narcotics trade amount to very high cash flows however none of it is accounted for in the GDP, thus it does show the extent to which drug trade exists.
• Does not Measure Standard of Living: GDP is not a measure of the overall standard of living or well-being of a country. Although changes in the output of goods and services per person (GDP per capita) can provide insights into productivity, they do not necessarily reflect quality of life (per capita) are often used as a measure of whether the average citizen in a country is better or worse off.

• Neglects Ecology: Often, producers can increase their output by polluting or damaging the environment. In developed countries, production is better regulated, and companies that violate environmental laws can face severe fines and penalties.
• Currency Conversion Issues: GDP figures for different countries must be converted to a common currency, such as the US dollar, and this may give misleading figures. Exchange rates against the US dollar may not be accurate for countries whose international trade is relatively small.
• Income Equality: The failure to account for or represent the degree of income inequality in society.
  • Data: The share of the bottom 50% was merely 6% of national wealth and over 4.6 crore Indians fell into extreme poverty in 2020.
• Negative Externalities: The failure to account for the costs imposed on human health and the environment of negative externalities arising from the production or consumption of the nation’s output.

2. Procedural Issues

• Data Delay: There is a data lag behind the actual happening in the economy, increasing the time to capture and understand the major structural change.
  • Data: In India, the most accurate GDP data revised estimates come after a lag of almost 3 years.
• Complex Calculation: The IMF, in its report on India, raised doubts over India’s methodology to calculate GDP, saying certain changes to historical series and discrepancies between GDP by activity and GDP by expenditure have made the growth calculation process complex.
• Economic Behaviour: GDP figures do not predict the economic behaviour of the people in a marketplace.

Alternatives to GDP Calculation

1. Human Development Index: The HDI provides a broader picture of an economy that includes social development. It also demonstrates that, while there is a correlation between economic and social development, the former does not guarantee the latter.
2. Genuine Progress Indicator: GPI shifts the value basis of a product by adding its social and environmental impacts to the equation. It also assigns values to non-financial human contributions, such as volunteering.
3. Green GDP: Green GDP embraces broader accounting of economic development that considers the effects of pollution and resource depletion.
   • Example: China’s Green GDP measures the cost of environmental damage as the result of economic growth by subtracting factors such as resource depletion and environmental degradation from the GDP.
4. Happy Planet Index: Developed by the UK’s New Economic Foundation, this GDP alternative is a nicely rounded, composite measure considering the social and environmental aspects of life to measure economic health.
5. Gross National Happiness: Coined by the 4th king of Bhutan, Jigme Singye Wangchuck in the 1970s, GNH focuses on four pillars – good governance, sustainable socio-economic development, cultural preservation, and environmental conservation.
6. Genuine Savings Indicator: The World Bank’s savings analysis argues that factors such as public investments of resource revenues and the social costs of pollution emissions are equally relevant in determining the overall level of saving.

INFLATION

It is the rise in prices of goods and services within a particular economy wherein the purchasing power of consumers decreases, and the value of the cash holdings erode.

Causes of Inflation

1. Demand-pull Inflation: Increases in prices due to the gap between demand (higher) and supply (lower).
   • Fiscal Stimulus: This will increase the money supply in the economy and will increase the aggregate demand and in turn cause inflation. The ways in which the government can increase its spending are:
     • For example: Schemes like Universal Basic Income (UBI), etc.; Increased financial assistance under PM-KISAN; Wages under the MGNREGA are increasing.
   • Population Pressure: Increase in population will increase the demand for goods and services. This would in turn create inflation.
   • Increase in Net exports: If essential items are exported from the country at an accelerated rate, then the demand for these goods will increase in the economy given their poor availability. This will in turn result in inflation.
     • For example: If Indian farmers export large quantities of food grains, onions, and other items, demand will not be met, resulting in demand-pull food inflation.
   • Monetary Policy: It determines the supply of currency in the market. Excess supply of money leads to inflation, hence decreasing the value of the currency.
     • For example: If the RBI has adopted a low-cost money policy, lower-cost credit will be available. As a result, people’s willingness to spend rises, resulting in inflation.
   • Populist policy: Policy decisions that enable accessibility of funds to the public and increased money supply will result in increased aggregate demand.
     • For example: The seventh pay commission put additional money in the hands of the public sector employees.
   • Private investment and FDI: Private investment is on the rise, which is due to liberalized FDI regulations that will, in turn, increase the money flow in the economy.
     • For example: Increasing forex reserves increase the money supply in the economy due to the RBI buying dollars.
2. Cost-Pull Inflation: It is caused by a shortage of factors of production like labour, land, capital, etc., and also due to artificial scarcity created due to hoarding.
   • For example: Brent crude prices crossed $65 per barrel in May 2021, more than double of what it was a year ago. Price of vegetable oils, a major import item, shot up 57% to reach a decadal high in April 2021. Metal prices are near the highest in 10 years, and international freight costs are escalating.
3. • Employees’ salaries being raised: The increase in salaries of the employees will have a bearing on the final cost of the product. Therefore, increased cost of production will result in cost-push inflation.
     • For example: The management of a manufacturing firm is compelled by a labor union to raise worker wages.
   • Firms’ profit margins: A firm’s profit margin is added as a part of the cost of production. Any increase in the profit margin of the firm will increase the cost of the product and cause inflation.
     • For example: When businesses opt to enhance their profit margin, the cost of goods and services rises. It usually occurs when a single company is the primary source of goods (monopoly).
   • Increase in Indirect taxes: An increase in indirect taxes will cause inflation.
     • For example: After the introduction of GST, many products and services earlier charged 12% of tax were brought into the 18% tax bracket, increasing their prices.

Impact of Inflation

1. Positive Impacts
   • Higher profits for producers: In most cases, inflation benefits the producers of goods. They make more money because they can sell their products at higher prices.
   • Increase in production output: When producers receive the appropriate investment, they produce more goods and services.
   • Benefit to debtors: During periods of inflation, investors and entrepreneurs are given additional incentives to invest in productive activities. As a result, they benefit from higher returns.
   • Equity holders: The security holder’s income depends on the profit of the company. In an inflationary situation, companies earn more profit, so equity holders also earn more income.

1. Negative Impacts
   • Real-Income falls for groups with fixed income: This means that people on fixed incomes, such as salaried workers, pensioners, and the like, will see a drop in real income. To put it another way, their purchasing power will reduce.
   • Balance of Payment (BOP): High prices reduce the amount of export and increase import from other countries where goods are available at a cheaper rate. It results in an unfavorable balance of payment.
   • Income Distribution Inequality Rises: Profits for business owners and entrepreneurs rise as a result of inflation. As a result, income inequality becomes more pronounced during this time period.
   • Disturbs the planning process: Inflation raises the prices of goods, raw materials, and factor services. As a result, the government must spend more money to complete any investment project initiated during the planning period.
   • Exchange rate: High import and low export means high demand for foreign currencies compared to domestic currency. This depreciates domestic currency.
   • Social and political: Higher rate of inflation leads to social and political tension. The political parties and organized groups of people call for strikes, hartals, and stage dharnas.
     • For example: Sri Lanka Crisis
   • Debentures or bond holders and savers: The Debentures or Bond holders and Savers receive fixed periodical income from their financial assets. The purchasing power of their asset remains intact only if the interest rate is more than the rate of inflation.
   • Domestic products might become less competitive: If inflation within the country is higher, it can weaken the currency of the country.

Remedies for Inflation

1. Contractionary Monetary Policy: Contractionary policy is manifested by decreasing bond prices and increasing interest rates. This helps in reducing expenses during inflation, which ultimately helps halt economic growth and, in turn, the rate of inflation.
2. Fiscal Policy: It deals with the Revenue and Expenditure policy of the government.
   • Tools of fiscal policy
     • Direct Taxes and Indirect taxes: Direct taxes should be increased and indirect taxes should be reduced.
     • Public Expenditure: Should be decreased (should borrow less from RBI and more from other financial institutions).
3. Supply Management measures:
   • Import commodities that are in short supply
   • Decrease exports
   • Government may put a check on hoarding and speculation
   • Distribution through Public Distribution System (PDS).
4. Rational wage policy: Rational wage policy helps to keep the cost of production under control. Cost control means price control.
5. Price control: Direct price control also helps in inflation control. Price can be controlled by fixing maximum price limits through administered price system and subsidy from the government.
6. Increase competitiveness: Introducing policies to increase the efficiency and competitiveness of the economy helps in reducing the long-term costs.
7. Invest in long-term investments: When it comes to long-term investments, spending money now for investments can allow you to benefit from inflation in the future.

Measures taken by Government previously

• Urjit Patel committee on monetary policy reforms: The committee suggested that inflation should be the nominal anchor for the monetary policy framework. The target for inflation should be set at 4% with a band of +/- 2% around it. Monetary policy decision-making should be vested in a Monetary Policy Committee (MPC) that should be headed by the Governor.
• Advisories: Are being issued, as and when required, to State Governments to take strict action against hoarding & black marketing and effectively enforce the Essential Commodities Act, 1955 & Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980 for commodities in short supply.
• Regular review meeting: On price and availability situation is being held at the highest level including at the level of Committee of Secretaries, Inter Ministerial Committee, Price Stabilization Fund Management Committee, and other Departmental level review meetings.

• Higher MSP: Has been announced to incentivize production and thereby enhance the availability of food items, which may help moderate prices.
• Price Stabilization Fund: A scheme titled Price Stabilization Fund (PSF) is being implemented to control price volatility of agricultural commodities like pulses, onions, etc.
• Buffer stock: The Government approved enhancement in buffer stock of pulses from 1.5 lakh MT to 20 Lakh MT to enable effective market intervention for moderation of retail prices. Accordingly, a dynamic buffer stock of pulses of up to 20 lakh tonnes has been built.

Pros and cons of Inflation Targeting in India

Inflation targeting is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. It will have price stability as the main goal of monetary policy.

Pros:

• It will lead to increased transparency and accountability.
• Policy will be linked to medium/long term goals, but with some short-term flexibility.
• It also helps in avoiding boom and bust cycles.
• If inflation creeps up, it can cause various economic costs such as uncertainty leading to lower investment, loss of international competitiveness, and reduced value of savings. This can also be avoided with targeting.
• Inflation targets can have various benefits, especially during ‘normal’ economic circumstances. However, the prolonged recession since the credit crunch of 2008 has severely tested the usefulness of inflation targets.

Cons:

• It puts too much weight on inflation relative to other goals. Central Banks start to ignore more pressing problems like unemployment.
• Inflation target reduces “flexibility”. It has the potential to constrain policy in some circumstances where it would not be desirable to do so.
• Cost-push inflation may cause a temporary blip in inflation.
• It cannot help remove supply bottlenecks and shortages.
• It cannot help external shocks; the exchange rate might suffer in the short run.
• Growth and employment might take hits in the short run.

Suggestions for Current Problem

1. Fuel duty cut: Further duty cuts by some amount, at least Rs 5 per litre according to experts.
   • It can likely lower the inflation by 15-20 bps.
   • It has immediate and secondary impact on electricity, transport cost.
   • A 1% rise in oil (Indian basket) could raise WPI by 8 bps.
2. Food Prices: Crackdown on supply side if hoarding happens.
   • Ease import limits on pulses, oil seed.
3. More duty cuts: More duty cuts for edible oil imports are required. However, it was reduced from 19.25% to 13.75%.
4. Buffer stock: Prepare to use buffer stock if inflation spills over to cereals.
   • A 1% rise in WPI primary food prices can push up CPI by 48 bps.
5. Other measures:
   • Press for faster growth: 10% higher industrial output can ease retail inflation by 40 bps.
   • Address supply bottlenecks
   • Boost income-generating capacity to reduce the burden on low-income households.

Way Forward

• Strength: India faces these challenges from a position of strength built on broadened vaccine coverage, financial sector resilience, robust export and remittances, and fiscal reprioritization to spur capital spending on infrastructure.
• Spurring private investment: Remains a key thrust area for sustaining growth on a durable basis.
• The third wave seems to be behind: With the removal of all curbs, alongside a broadening of vaccination, economic activity is returning to speed.
• Most sectors are reaching or have exceeded pre-pandemic levels: Bank credit has gathered pace, and the job market is gathering steam.
• Growing GST collections: Is an indicator of growth in the segment of the economy that collects the tax.

POVERTY ESTIMATION

Poverty elimination has remained a major challenge right from independence and lies at the core of India’s national development agenda to create a just and equitable society. Given the limited resources, reliable estimation of poverty is the first step towards eradication of poverty as a basic input for the design, implementation, and monitoring of anti-poverty programmes.

Various Committees and their Recommendations on Poverty Estimation

1. Dandekar and Rath 1971: Based on data from the National Sample Survey (NSS) conducted in 1960-1961, they conducted the first systematic analysis of poverty through the expenditure method in India in 1971.
   • They contended that the cost necessary to provide 2250 calories per day in both rural and urban areas should be used to determine the poverty level.
2. Alagh Committee (1979): A task force constituted by the Planning Commission under the chairmanship of Y.K. Alagh constructed a poverty line for rural and urban areas on the basis of nutritional requirements and related consumption expenditure.
   • Poverty estimates for subsequent years were to be calculated by adjusting the price level for inflation.
3. Lakdawala Committee: The following recommendations were made by the Lakdawala Committee (1993), a Task Force led by D.T. Lakdawala, based on the notion that the consumption patterns of the poor are reflected in the baskets of goods and services used to calculate the CPI-IW and CPI-AL.
   • Calorie consumption should serve as the foundation for calculating consumption expenses.
   • The CPI-IW for urban areas and the CPI-AL for rural regions should be used to create and update state-specific poverty lines.

1. Tendulkar Committee (2009): Expert group constituted by the Planning Commission and chaired by Suresh Tendulkar, was constituted to review the methodology for poverty estimation and to address the shortcomings of the previous methods.
   • It based its calculations on the consumption of items like cereal, pulses, milk, edible oil, non-vegetarian items, etc.
   • Unlike the Alagh committee, Tendulkar Committee computed new poverty lines for rural and urban areas of each state based on the uniform poverty line basket.
2. Rangarajan Committee: It has also used a different methodology wherein a household is considered poor if it is unable to save.
   • The poverty line should be based on: Normative level of adequate nutrition and an ideal and desirable level of nutrition.
3. NITI Aayog Task Force 2016: Based on the work of the Taskforce and deliberations with states, the report of the Task Force was submitted in 2016. The task force suggested four options for tracking the poor.
   • Continue with the Tendulkar poverty line;
   • Switch to the Rangarajan or other higher rural and urban poverty lines;
   • Track progress of the bottom 30% of the population;
   • Track progress along with specific components of material poverty such as nutrition, housing, drinking water, sanitation, electricity, and connectivity.

Importance of Poverty Estimation

• Policy Direction: Poverty estimates can clearly show the sectors or areas most in need of welfare measures.
• Analysis: Poverty estimates are not just important for academic purposes but are also crucial to gauge the impact of various government policies such as demonetization.
• Poverty Alleviation: Only after obtaining a proper analysis of the extent of poverty can poverty removal measures be effectively put in place.
• Inclusive Growth: Bringing inclusive growth by addressing inequalities and other issues of basic needs, learning, and job opportunities.
• Economic Growth: Policy direction towards poverty alleviation through estimates will ensure economic growth in the long run.
• Constitutional Requirement: Poverty estimation paves the way for poverty elimination, which in turn prepares the ground for a just and equitable society.

Issues

1. Lack of Policy Focus: Unlike the raging debate on the extent of jobs created, based on privately conducted surveys, there is no debate on what happened to poverty after 2011-12.
   • Example: The Rangarajan committee submitted its report in July 2014, but there has been no information on whether the government has accepted or rejected the report.
2. Outdated Data: One result of this is that almost all rural development programs and other fiscal transfers based on poverty estimates continue to rely on outdated estimates.
3. Lack of Alternate Data: Unlike the employment-unemployment surveys for which there are alternative estimates such as the Labour Bureau surveys, there are no alternatives for consumption expenditure surveys.
4. Components of PLB: Determining components of Poverty Line Basket (PLB) is one of the challenges of poverty line estimation because of the price differentials which vary from state to state and period to period.
5. Complexities in Qualitative Data Collection: Understanding poverty and well-being is a complex process due to India’s high socioeconomic diversity. Also, for such a large population, collecting comparable data on subtle and complex elements/sections of society like women is difficult.
6. Demographic and Economic Dynamics: Further, consumption patterns, nutritional needs, and prices of components keep on changing as per the dynamics of the macroeconomy and demography.
7. Problem of Determining Threshold: If the poverty threshold is high, it may leave out many needy people; while if it is low, then it would be bad for the fiscal health of the government.

1. Data Lag: Even within these data sets, we can have a significant lag in household data or data errors.
   • Example: The Consumer Expenditure Survey (CES) is conducted every five years.
2. Lack of Consensus: Among the states over the acceptance of the Tendulkar and Rangarajan committee report.
   • Some states, such as Odisha and West Bengal, supported the Tendulkar Poverty Line, while others, such as Delhi, Jharkhand, and Mizoram, supported the Rangarajan report.

Way Forward

• Updating Poverty Lines: Given that India is becoming a middle-income nation, poverty standards must be updated to reflect changes in income, consumer habits, and pricing.
• Hybrid Approach: The hybrid approach would measure poverty from the perspective of a common global standard of living and relative poverty within countries.
• SECC Data as an Alternative: The SECC is useful for identifying potential beneficiaries of social programs such as affordable housing, electricity, water, and toilets but not for tracking overall poverty over time.
• Multidimensional Approach: In India, there is also a growing recognition of the need for a multidimensional approach to move towards the vision of a poverty-free India. Global MPI is already providing useful information on deprivations in various areas and at disaggregated levels.
• Poverty Differentials: It is also important to differentiate between chronic poverty and sporadic poverty: the former, a result of generations of deprivation, and the latter, a consequence of a sudden crisis or short-term shock-like the current Corona pandemic.
• Social Registry: Social Registry is a dynamic information system on beneficiaries and benefits to promote the inclusion of intended beneficiaries as well as synergies among welfare programs. It is being implemented in many countries—Chile, Brazil, and Turkey—as forerunners in implementing Social Registry.