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Rajan's about-turn on GDP: Why central bankers should be clear on what they speak

There is immense importance attached to every word a central banker utters, not just in India but in every country. Financial markets and media watch for their comments for cues, guidance on the state of economy and the likely course of monetary policy. Their comments are highly influential to direct the short-term course of financial markets.

Raghuram Rajan. Reuters

Raghuram Rajan. Reuters

Arguably, a central banker’s comments on economy carry much more credibility than a statement coming from a politician since the banker is a bureaucrat devoid of political or personal bias. Also, a central banker is often privy to key macro economic trends well in advance. That is why economists, media and international agencies await their comments. For the same reason, any flip-flop in their stance creates confusions.

Reserve Bank of India (RBI) governor Raghuam Rajan, a world renowned academic, economist and a central banker since 5 September 2013, is not someone who changes his stance every now and then. In Rajan’s own words, “My name is Raghuram Rajan and I do what I do 9and say what he say).” Rajan is known for his blunt and honest views, some times controversial ones, on various economic issues regardless of whether the power centres in the North Block are in agreement with them or not.

Also, the former International Monetary Fund (IMF) economist and Chief Economic Advisor (CEA) to the Indian government has never restricted his comments to topics pertaining to his domain — central banking — but a range of other issues including politically sensitive subjects such as ‘intolerance’, government-sponsored schemes and politically connected crony capitalists.

But, on Friday, Rajan seemed to reverse a crucial statement that he made just one day earlier — on the accuracy of gross domestic product numbers and the way government is calculating this measure of economic growth — which created confusions among public. “There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth," Rajan said in his address at the 13th convocation at the RBI-promoted Indira Gandhi Institute of Development Research on Thursday. The comment instantly caught the attention of national media since there were questions raised on India’s GDP numbers ever since (to be specific one year back) the Narendra Modi government introduced new measure to count the GDP (based on gross value added (GVA) method instead of based on factor cost) and changing the base year of GDP calculation to 2011-12 from 2004-05.

The new method of GDP calculation instantly lifted the country’s GDP growth to 7.3 percent (now revised again to 7.2 percent) in fiscal year 2015 compared with 5.5 percent under the old series. This wide variation pointed to a disconnect between the new set of GDP numbers and high frequency macro-economic indicators in the economy, such as bank credit growth, corporate performance, auto sales, factory output and growth in the manufacturing sector.

But on Friday, while delivering the C D Deshmukh Memorial Lecture in Delhi, Rajan said he didn’t mean what had been interpreted by the media. “It was not anything about new GDP numbers or the way GDP is calculated. I think it's broadly correct," Rajan said, adding there are "no hidden messages" in his words and "You do not have to gauge intent. I am direct when I speak".

There are reasons why a section of economists have questioned the rebased GDP numbers. A Firstpost highlighted in a previous article, a highly stressed banking sector and tepid credit growth do not reflect a fast growing, strong economy. Secondly, the manufacturing growth has been tepid.

The tepid growth in factory output, also reflected in the core sector growth (fell 1.3 percent in November) and monthly PMI data (to 49.1 from 50.3 in November) indicate that revival in manufacturing activity has remained elusive. Third, corporate earnings haven’t picked up and finally, consumer demand and rural demand, in particular, has been poor. In this context, there is no surprise why Rajan’s comments on GDP caught immediate attention.

Were Rajan’s words misquoted or misinterpreted by the reporters who covered his IGIDR speech? The speech isn’t uploaded on the RBI website until this time nor did the RBI issue any official clarifications on his statement.

As Rajan himself said, the governor possibly didn’t intent to question the accuracy of India’s GDP numbers or the method of calculating GDP. But, clearly, his comments did appear to do so and spread confusion.

Updated Date: Feb 01, 2016 08:26 AM

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