Why Kaushik Basu’s assessment on GDP debate and his prescription to cure economic slump are confusing

  • At a time when the economy is going down on all fronts, there is no point in sticking to fiscal deficit obsession

  • Basu wants the government to temporarily skip the path of fiscal prudence and spend more to stimulate demand

  • India has already deviated from the fiscal deficit road map for at least three consecutive years

Noted economist Kaushik Basu has joined the GDP data debate (are India’s GDP numbers true or not?) triggered by former CEA Arvind Subramanianan’s research-based findings on allegedly overestimated the GDP numbers. Basu, in his Indian Express column, explains his thoughts on this. The crux of Basu’s article is that he doesn’t think “India’s GDP computation has obvious flaws” and “the divergence (between economic indicators and headline GDP numbers) demonstrated by Subramanian reveals underlying disturbances in the economy.”

The problem here is that there is no clarity in Basu’s argument. Subramanian, after analysing 17 major economic indicators, also said that the weakness seen in the economy after 2011-12 didn’t correlate with the high Gross Domestic Product (GDP) numbers reported under the new series. The GDP growth should have been at least 2.5 percentage points lower, Subramanian said. That’s exactly an obvious flaw in the computation process ie., it didn’t capture the real growth scenario on the ground.

So what does Basu mean by saying he didn’t think there is an obvious problem with the GDP data calculation but admitted Subramanian’s paper revealed only the weakness in the economy during the disputed period? The fact is there was indeed a mismatch.

 Why Kaushik Basu’s assessment on GDP debate and his prescription to cure economic slump are confusing

Representational image. Reuters.

Having stated that the economy is staring at a slowdown phase, Basu has some interesting recommendations for the Narendra Modi government to “ward off short-run risk and strengthen long-run sustainable development?”. Usual prescriptions—higher household investments, infrastructure push, more focus on education etc—recommended by the economists from time to time. But with one exception—Basu proposes dilution in the roadmap to fiscal consolidation.

Basu recommends, “We should be prepared to make a measured increase in fiscal deficit for a year or two. This will boost demand for goods and be a much-needed shot-in-the-arm for India’s firms and farms. If the extra expenditure is directed at the poor and the agriculture sector that will help those who need it most,” Basu wrote.

Basu’s suggestion makes immense sense. At a time when the economy is going down on all fronts, there is no point in sticking to fiscal deficit obsession. But, at the same time, this wasn’t Basu said always. In 2013, when he was the chief economic advisor (CEA) in the United Progressive Alliance (UPA) government, Basu had all along argued in favor sticking to the roadmap to the extent possible even in a recessionary phase. He didn’t recommend this solution back then.

“There is no thinking as of now on revising the deficit target. You have to keep in mind that in industrialised countries, there are discussions on going a little slow on fiscal consolidation, owing to the recessionary tendency all over,” Basu had said then.

In other words, Basu wants the government to temporarily skip the path of fiscal prudence and spend more to stimulate demand. But the other side of this is that the Fiscal Responsibility and Budget Management Act (FRBM) created to bring in fiscal prudence in the economy will totally lose its relevance. India has already deviated from the fiscal deficit road map for at least three consecutive years and continuing this will have implications on fiscal and monetary policies. If that happens, India is consistently failing to honor the fiscal deficit commitment under the FRBM. This would raise some uneasy questions on the country’s commitment to fiscal prudence.

The FRBM came into existence in 2003 in order to make the government accountable to sound management of its finances but it has not been a big success so far. This Act was reviewed in 2016 and the committee concerned charted out a path to cut the fiscal deficit to sub-3 percent in the years post-2020.

Of course, the Act offers some leeway to the Central government to deviate from the deficit target; for instance, if there is a severe economic crisis in the country on account of drought, but the question is if we have reached that point already?

Further dilution in fiscal deficit path wouldn’t make some in the monetary policy committee (MPC) happy and may even leave some disgruntled faces at the panel about the government’s fiscal commitment. That could reflect in rate decisions in turn affecting growth. To sum up, Basu’s assessment on GDP fiasco and his medicine to cure economic slump are confusing and may upset the MPC.

Updated Date: Jul 24, 2019 14:44:12 IST