India trails Hindu growth rate

This speedometer of the Chinese economy runs pretty fast. We tried to prove that point a few web pages back. Our contention has been that China's growth rate is not even half of the 9-10% that Beijing and others would have us believe. If it is so with China, can India be far behind? Asked our readers. 

Yes. India is no better. The high growth claims oversold by Manmohan, Chidambaram, Ahluwalia & Co. rest on skulduggery. The official growth rate of 8-9% is product of overestimated growth and underestimated inflation, argues Mr Arun Kumar, Professor of Economics, JNU Delhi, in the following pages. 

Adjusted for real output levels the official rate straight away drops by 2% to 6%. Subtract 1.9% arising from the revised output series of 1999-2000. If similar changes earlier and inflation plus other negatives are factored in, what remains is a less sparkling rate, far below the Hindu growth rate of 3% or so. 

More important, the GDP growth comes at the expense of the marginalised population. Outside the purple patches of farmhouses and condominiums in and around Delhi and other metros, there is misery, one of the most visible symbols of which is the line up of the farmers in the death row. Sadly even the RBI, which is struggling to show off its independence, fights shy of coming up with an in-depth analysis of the economy. 

THE FLAWED MACRO STATISTICS:
OVERESTIMATED GROWTH AND 
UNDERESTIMATED INFLATION

Arun Kumar
Professor of Economics JNU-Delhi

PRELIMINARIES
According to the Economic Survey 2005–06, the economy is doing well on the various macroeconomic fronts. Rate of growth of the economy, sectoral growth rates, rate of inflation, Investment and Savings, fiscal deficit and the Balance of Payment front portray the dynamism of the Indian economy in 2005–06. There are negatives like, stagnancy on the farm front, farmers suicides, growing inequality and rising unemployment. In the current congratulatory mood of the government and the ruling groups, it is assumed that the positives overwhelm the negatives. The media, both national and international has also projected this line. In the Alternative Economic Survey 2004–05 it was argued that the negatives mentioned above are a consequence of the growth path the economy is following since growth is iniquitous. In other words, the positives and the negatives are interrelated and the former is the cause of the latter.

In the Economic Survey of 2004–05, it was argued that the economy has transited to a new growth path but it was argued in the Alternative Economic Survey 2004–05 that there is no new growth path. If at all, the acceleration took place in the 1980s and not in the 1990s. So the new growth path is traceable to the 1980s, prior to the launch of NEP in 1991. Further, it was shown that the path after 1991 has led to rapidly rising disparities compared to the scenario in the 1980s. Finally, it was also shown that the growth path is narrowly based so that cyclical behaviour has got accentuated. The government has given up its analysis presented in the last year’s Economic Survey.

While it is true that the focus is on growth and the equity aspect is no more even paid lip service to in our policy discourses, (because that is the characteristic of the neo-liberal policies) we need to reassess the data on the rate of growth itself, the rate of inflation and the magnitude of the fiscal deficit in the post 1991 phase to see whether they are what the government claims them to be. If the claims are not correct then India may not be doing as well as the government claims.

This paper first looks at the past 15 years performance of the Indian economy as projected by the official data and then analyses two of the critical variables in detail—rate of growth and rate of inflation—to assess whether the official data represent the correct picture of the economy. The other critical variables, like, the fiscal deficit, are analysed briefly.

Annual FIGURE 1

SOME MACRO DATA SINCE 1991
The new Economic Policies (NEP) launched in 1991 have led to a structural change in the economy. The macro economic performance of the economy can be assessed by looking at some data for a few key macroeconomic variables for the period 1991–92 to 2005–06. In Figures 1 to 4 , data are presented on GDP Growth, Sectoral Growth rates, Employment, Inflation, Current Account Surplus and the Fiscal Deficit.

FIGURE 2

FIGURE 3

 It is clear that after initial difficulties (till the mid 1990s) that may be said to be due to the problems of transition, the economy has settled to a different rhythm than in the pre 1991 phase. GDP growth hardly shows a trend; it has fluctuated and. inequality has grown. Services sector is doing well while agriculture has languished.Regional disparities have grown with some States growing faster than others. Within the States also, rural and urban and backward and forward areas are getting differentiated. Employment elasticity has fallen all around. The Fiscal deficit after initial resistance came down then went up and has again declined since 2001–02. Foreign exchange reserves have risen sharply with an improvement in the current account deficit and flow of foreign capital (FII plus FDI plus NRI funds). Rate of inflation has stabilised after the mid 1990s at a much lower rate than earlier. Official statistics claim that poverty has come down. Scams dominate news indicating that the size of the black economy is continuing to grow.

IS THE RATE OF GROWTH FOR REAL?
When we measure GDP of an economy, it is the sum of the production of goods and services which provide welfare to people. Growth of the economy is therefore supposed to reflect the increased welfare of the people. However, this need not always be the case as can be seen by the example of digging holes and filling holes. There is activity without productivity. People are busy without producing anything that will improve the welfare of society. In the normal way of calculating output, it increases when holes are dug and then again when they are filled up but no useful output is produced so welfare enhancement in society is zero. There is waste associated with this activity. Many other activities have a similar characteristic. Thus, if a part of growth is based on increasing waste, then that should be netted out of the growth rate since there would be no corresponding increase in welfare.

FIGURE 4

Consider production resulting in environmental degradation or destruction.The contribution of such activities to GDP is overestimated. To the extent the environment is degraded by an activity, the useful output from the activity is less. Further, clean up measures are required and these then add to the work done and therefore add to the GDP. This should be further netted out of the GDP since the environmental clean up only restores the environment to its original state and does not add to the welfare. Further, due to the net amount of pollution (since clean up is seldom complete), the health of the citizens is adversely affected and there is greater demand for medical services—doctors, nurses, clinics and hospitals. Finally, the citizen may suffer permanent damage to health. All this is like digging holes and filling them.

Any economy has a certain amount of unpaid work. This is not counted in the GDP. For instance, work of mothers cooking at home and managing the house is unpaid work and is not counted in the GDP. When such work is substituted by purchase of food from a restaurant (which is monetised) or through the employment of a servant for a salary or by sending the child to the Creche then without any additional work being done, these contributions are counted in the GDP. If the woman is doing work outside the house, and, therefore, does less work in the house, it may be argued that her welfare has gone up. But her new work is accounted for in the GDP; the additional welfare is taken into account. If she has no time for work at home due to long travel time to work, no useful work results in the activity of travel and welfare does not improve. But the work she is not doing, the unpaid work which is substituted by someone else does not result in additional improvement in welfare in society so should be netted out. These kinds of changes are based on the structural changes in the economy and post 1991 such changes have accelerated as commercialisation has spread rapidly. These lead to the over-estimation of GDP.

The services sector is the fastest growing component of the GDP. This is a result of the rapid structural change in the economy and the displacement of the unorganised component of this sector by the organised component. Hence this sector needs to be closely looked at to see how much is it really contributing to the growth of GDP and welfare of the citizens. For instance, growth in the health sector is partly due to privatisation and the much higher valuation of these services as compared to those provided by the public sector. Further, there is an increased demand for health services due to the enormous increase in pollution levels. There are increased life style related health problems of the well off, like, obesity and diabetes and at the other pole, the increase in disease like AIDS and the rapidly growing injuries due to increased use of machines in agriculture Finally, there is the increase in illegality in the form of spurious drugs, unnecessary testing, operations (like, cesareans) not required and illegal activities like, amniocentesis. All these are like digging holes and filling holes. Such increases in health services cannot be called welfare enhancing. Some of them barely keep the health of the population at the earlier levels. Health services only maintain the healthy stock of people and are like the maintenance provision for machines. However, there are activities which lead to permanent damage to health and even health services fail in restoring it. Considering the above mentioned 4 types of cases, some of the factors leading to over-estimation of growth are presented below in 4 sub-sections: 

CHANGE IN BASE AND STRUCTURAL CHANGES IN THE ECONOMY
The Economic Survey reports that the base for calculating the GDP has been changed from 1993–94 to 1999–2000. This has added 0.5 per cent to the rate of growth of the economy in 2004–05 (GOI, 2006: 3). The argument for this change of base is that the fast growing sectors of the economy were under represented in the old scheme of things. The addition of 1.3 per cent to Capital formation due to definitional change is another factor for the higher growth rate.

On the face of it, the argument for change appears to be valid . Any economy undergoing structural changes is bound to have some sectors which do better than others. This is also true for the Indian economy since 1991. However, within a given sector also there are fast and slow growing components. For instance, in agriculture, commercial crops may be doing better than the traditional subsistence crops. So, the weight of the former would increase while that of the latter would go down. In this case, the weights have to be adjusted rather than simply including the faster growing components and dropping the others. This would unduly bias upward the growth rate and make it non-comparable with the earlier performance. Quick estimates of GDP suffer from such bias.

The structural changes in the economy require the method of estimation to change. For instance, all the sectors have an unorganised and an organised component. The former is at times measured as a ratio of the latter (for which the data are available). For the sectors for which data are not available annually, surveys are conduced periodically and then an index is applied to get the year to year growth (GOI, 1999). Since the parameters of the economy have changed, the rate of growth measured using the base year data may not give the correct result. A few examples of this are presented below.

1. The organised sectors are growing faster than the unorganised sectors so that the ratio between them is changing and applying the same ratio as in a given base year would result in over estimation of the growth of the unorganised sector.
   
2. The organised sector growth is displacing the unorganised sector, like, in the case of retail trade. Expansion of the large scale sector is displacing the small and cottage sectors. Malls, specialised stores and departmental stores are affecting the business of small retailers. In this case while the former is being captured by data, the latter is not being captured independently and the rate of growth is over estimated. This would also be the case with plastic ropes replacing traditional ropes or deep sea trawlers affecting adversely the small fishermen and other such examples.
   
3. There is growing under employment as indicated by data (GOI, 2006:209 and Kumar, 2005a) and this affects the estimation of the output of the unorganised sectors. The index used to inflate the figures beyond the base year is usually employment and wages. Since under employment has grown, use of unadjusted usual status employment data would over estimate the contribution. Further, in Kumar (2006) it has been shown that employment is over estimated due to the existence of the black economy so that this problem is aggravated even more.
   
4. The structural changes are resulting in the expansion of the large scale sector at to the expense of the small scale and decentralised sectors. This is resulting in greater displacement of people from their places of stay. While there is continuing displacement from earlier mega projects, like, Tehri and Narmada, new displacement is being added through mega infrastructure projects, like, new airports and expansion of older ones, expansion of National and State Highways, and Metro and railways. New large scale factories are coming up, like steel plants, refineries, and so on People are resisting their displacement as visible in recent movements. Finally, there is demolition of jhuggis in urban areas.
   
   In all these cases of displacement, the assets of people are destroyed and this is not taken into account while what they create afresh out of compensation money or through savings or loans is added to the GDP. Actually, there is no net additional production. Such displacement also lowers the rate of capital formation in the economy since the depreciation element is larger due to displacement
   
5. People are eating out more than they were doing earlier due to change in habits, pressure of urbanisation and working spouses. People are traveling longer distances to work so have less time for taking care of home and cooking. Thus, eating out has expanded rapidly. In this case, the earlier unpaid work is being replaced by paid work in the market. However, the welfare of the citizen does not increase. Thus, a portion of the increase in GDP due to the restaurant business, crèche and domestic work should be discounted.
   
6. Due to structural reasons, there is rapid replacement of hardware and software. Pace of obsolescence has quickened. This is not only true for the computer industry but also for other modernising industries, etc, like, in the case of the replacement of diesel by CNG in public transport. In these cases, the product (and software) is replaced much before the useful life is over. In other words, depreciation norms need to be much higher and net output and capital formation should be taken to be lower. 

Actually, in the cases presented above, the net effect needs to be taken into account. Encouraged by the NEP, with say dilution of reservations for the small sectors and bias in policy towards big capital, the modern sectors are growing in a classic capitalist mode and displacing the traditional sectors. Thus, the rapid growth in the modern sectors is being captured in the GDP but it does not account for the decline in the lagging and the traditional sectors. This also has serious distributional implications which the data hides.

IMPACT OF ENVIRONMENTAL DEGRADATION
As already argued, often there is double and multiple counting when production degrades the environment. In the post 1991 phase the environmental laws have been relaxed in the name of growth (Kumar, 1994). Consequently, there is growing river and air pollution and destruction of forests and green cover. The disappearance of tigers is only one of the better known stories. Some people are happy that there is reforestation (usually mono culture) leading to an increase in the forest cover but this is not the same as retaining a forest with its undergrowth and diverse wild life.

1. The activity of tree felling and then afforestation through mono culture does not replace the original forest. Hence the depreciation should be taken to be higher.
   
2. Depreciation norms for mining and extraction need to be revisited given the kind of illegality that is involved in this industry. Due to this, there is over exploitation and the environment is damaged beyond repair. Coal mines in several parts are now burning out of control. Stone quarrying is another example of what is happening to the surrounding environment. Thus, the depreciation provisions need to be much higher for this sector .

3. There is a dramatically rising number of motorised vehicles (15% per annum) resulting in large scale noise and air pollution. Even replacement of diesel with CNG has hardly helped. One can say that without this move the situation could have been worse. Citizens of Bangalore are familiar with the deteriorating air quality. This has resulted in a dramatic rise in cancer and lung and breathing related problems for the young and the very old. There is really no remedy since the citizen is distinctly worse off even after the correctives are applied, like, diesel substituted by CNG. Health problems continue to increase

4. India has become a centre for recycling toxic materials, given its lax standards and growing corruption. Ship breaking, recycling of war metal scrap, plastics, lead acid and computer hardware are only some of the better known examples. All these are highly toxic and result in a huge increase in health problems

5. Due to laxity or non implementation of standards, water (surface and underground) is seriously polluted creating a scarcity of clean drinking water. This has not only resulted in health problems but an expansion of the water industry. The problem is further compounded by the fact that the municipal supply of water is not trusted and water is either boiled or filtered, and so on None of these are perfect and result in a deterioration in the health status of the population

6. In agriculture, the indiscriminate use of fertiliser and pesticide is impacting the soil and the health of the farmers and the consumers. A recent study by ILO highlights this aspect. Not only have the health costs risen but due to increased toxicity, soil is degrading so that its productivity is declining

7. Production of polluting goods like, metals, chemicals, leather goods and paper is aggravating pollution.

All these examples suggest that there is an increasing amount of activity which is not adding as much to the citizen’s welfare as the output increase indicates due to the environmental impact and in fact through the rising health costs it is making many of them even poorer than they were and health wise worse off. Further, the depreciation norms need to be much higher than they are. Thus, the GDP contribution from these activities needs to be lowered. In all these cases, the producers are pushing the costs to others or to the future to make higher current profits.

IMPACT OF WASTE
Waste in society results in activity akin to digging holes and filling them. This has some similarities with Baran’s concept of Unproductive labour (Baran, 1973). welfare as the output increase indicates.

1. In addition to pollution discussed above, medical malpractices, spurious medicine and adulteration of food, spices and milk result in greater expenditures on health without adding to the welfare of people. These are all like social bads and not goods. All these activities are on the rise and need to be netted out of the GDP.
   
2. Life style related health problems of the well off are increasing. Excess foodconsumption or wrong kind of food is first counted in GDP and then when it results in health problems, like, diabetes, the treatment is again counted as output.

3. Due to growing competition there is increased emphasis on packaging but that does not add to the use value of the product while the value added goes up. For instance, the cost of drinking water in bottles is mostly for its packaging, transport, storage and sales. One may also mention the use of polythene bags for shopping. This has caused havoc to drainage, animals and to the environment. Its negative effect far outweighs its positive contributions 

4. Clean drinking water is supposed to be supplied in urban areas by the Municipal corporations. However, due to leaky pipes and other reasons, water in taps cannot be trusted so that there is a rise in the use of local/individual systems to filter water or of bottled water and boiling it before use. Thus, there is double counting of water supply.

5. Due to failure of power supply there is a growing use of inverters, UPSs and stabilisers in homes and commercial establishments. Inverters do not result in more power generation but only its storage. The use of stabilisers and UPSs leads to increased capital costs

6. Power is wasted both in transmission and due to non-standardisation of equipment which leads to leakage. Theft of power is carried out through use of non standard equipment and temporary connections which results in wastage of power. Further, due to the modern tendency of leaving equipment on in standby mode there is wastage of power. Consequently, a significant amount of power that is produced is wasted. This is not counting theft of power, which may be gainfully used even if it does not generate revenue for the electricity producers

7. Underutilisation of irrigation potential of dams and flooding of fields results in waste of resources. Capital is under utilised and fields get water logged

8. Poor quality construction and breakdown of infrastructure—like, roads and buildings—results in repeated maintenance of the structures or their breakdown. In the case of roads, they also result in greater wear and tear of vehicles. Such expenditures do not result in increased welfare

9. Urbanisation is resulting in increasing travel distances and even longer travel times for citizens. Due to rising traffic densities, the average speed of traffic is falling. This raises the travel time, increases fuel cost and causes more pollution. The increased use of transportation is then not correspondingly increasing the welfare of individuals. For instance, travelling longer distances to work may result in an increase in the contribution of the transport sector to GDP but it does not result in improved welfare of the people. For commuters, transportation is only a means to do useful work and not an end in itself. A city like Delhi demonstrates how there is a vicious cycle of expansion of roads, building of flyovers, more purchase of automobiles, more pollution and congestion and slowing traffic speeds

10. Criminalisation in society and growing need for law and order machinery of all kind do not result in any increase in welfare of individuals. This is resulting in the rapid expansion of the private security services without solving the problem and has resulted in growing production of safety gadgets, locks, and so on

11. In India, waste is aggravated by the growing black economy (Kumar, 1999). It is partly like digging holes and filling holes. For instance, bureaucrats do not do work automatically to extract a bribe, police collects hafta and encourages illegality and so on. This is activity without productivity. 

With the NEP and fillip to the services sector there has been some artificial increase in output.

1. Certain kinds of expenditures on health are not GDP enhancing since they only maintain the healthy stock of people
   
2. Certain government services and the corresponding expenditures need reassessment. For instance, expenditures on disasters and relief. Assets are only replaced by government expenditures . From time to time, property has been destroyed by floods, Tsunami, fire and earthquakes. Government relief is only replacing assets
   
3. The growing mechanisation of agricultural operations is resulting in more and more injuries. The machines are mostly of inferior quality with few safety features (to keep the cost low). The staff used to operate the machines is ill trained or illiterate and is unable to properly operate the machines so that the rate of accidents is high. This results in undue medical expenditures.
   
4. Increase in prices of services, like, due to privatisation of health and education is leading to price and not quantity changes. Earlier where for a given service in a public hospital the charge was x, the private hospitals may charge 5x. While it is true that there is an element of subsidy in the public hospitals but a part of the increase is due to the luxury character of the private service providers and the much higher salaries and consultancies paid to the experts. Similarly, in the case of the private institutions of learning, the fees charged are much higher without always providing better quality services. There is a proliferation of coaching and tuition at high cost and this has added to the cost of education without improving it. Both health and education have got heavily commercialised and have become sources of huge profits after 1991
   
5. The imposition of the services tax has led to an increase in the prices of a variety of services. It is true that the customs duties have been reduced substantially since 1991 and that has resulted in the decline of prices of certain goods. This is reflected in the low official rate of inflation. However, the services on which the service tax is levied are not even counted in the basket for measuring inflation, CPI or WPI. Usually the value of a service is counted as the contribution to the GDP so that the pre tax and the post tax situation are not comparable (See Section on ‘Underestimated Inflation’ below)
   
6. In the post 1991 phase, there has been growing privatisation of a large number of services, as in the case of health and education as discussed above. To these one may add the case of courier services, telecommunication, air services, and so on In some of these cases there is redundancy in the public sector and in other cases, same service is provided at higher cost so is taken to give higher value added. Thus, there may be a tendency for over estimation. In many cases, public sector managers have been hired by the private sector at much higher salaries and this adds to the cost of services. Examples of pilots, banking, insurance, petro goods come to the mind.

The sustained growth of GDP for the last 3 years is based principally on the growth in the services sector, like, transport, trade and construction and so on and as pointed out above, there is over estimation of GDP in each of these cases or there is no additional contribution to citizen’s welfare or the contribution due to health effects is much lower. If unproductive labour in the sense of Baran (Baran, 1973) were also to be considered, the contribution of the services sector would be further reduced. This is being ignored in this paper.

UNDERESTIMATED INFLATION
As mentioned in section I, the rate of inflation after remaining at high levels for the first 5 years after 1991 has tapered off and has been hovering at the level of around 5 per cent for the remaining period (Figure 4). This is a creditable achievement since it is often said that due to the Structural Adjustment of an economy, the rate of inflation is bound to go up. However, is the rate of inflation representative of the actual price rise?

The rate of inflation is measured by the wholesale price index (WPI) or the consumer price index (CPI). The consumer price index is different for different consumption classes and different areas of the country on account of the differences in the consumption baskets and variations in the prices of goods and services. Hence typically, the rate of inflation is measured by the wholesale price index. For the purpose of indexation of wages in the organised sectors, the industrial workers’ consumer price index is used

The economy produces around 55 per cent of the output of the white economy in the Tertiary sector. However, in the WPI, there is no representation of this sector and in the CPI it has 16 per cent representation. Thus, neither of the two price indices represent the structure of output in the economy. It is true that services get included in the final goods purchased but that is not always the case since many services are consumed directly and are not inputs into others, like, restaurants, doctors, teachers and financial services

With cuts in subsidies, privatisation and retreat of the state, the prices of various services have climbed steeply in the last 15 years as pointed out in the previous section. This finds no reflection in the price indices. For instance, with the rapid expansion of the private sector in banking, one has to keep a large sum of money as minimum deposit and pay for each service, like, the use of ATM, obtaining statement, issue of cheque book and so on

The imposition of service tax as mentioned in the previous section has led to a further increase in the prices of final services used by consumers. It is an indirect tax and works as a prime cost for industry hence inflationary. Since these services are not covered in WPI or CPI, they are not reflected in the rate of inflation. Since now about 1 per cent of GDP is collected from services tax, this is the extent of additional inflation due to the imposition of the tax.

The lower official rate of inflation in the last few years is a result of several factors connected with globalisation. Opening up and cheap imports or the threat of imports is one factor in keeping the prices of traded goods down. The weakness in international prices is linked to at least two factors. First, the position of labour has weakened globally. This is due to the mobility of capital and its ability to demand concessions from one government after another, including from the governments of the advanced countries (See Box 1 in the Fiscal Chapter). One of the concessions extracted is to weaken labour. Thus, in the new sectors in India, IT, call centres and BPO industry, and biotechnology, and so on, there are no trade unions. In the new zones being set up there will be no Unions. Hire and fire is being steadily introduced and the police brutality witnessed in various places is an indicator of which side the government is on. The courts have also made their stand clear that they are against the historically developed instruments available to labour to fight capital. 

Second, due to the increasing competition amongst the countries of the developing world, the price of many basic goods they provide have either fallen or not risen at all. So, for instance, in textiles or toys or metals and other goods the developing countries are competing and undercutting each other. This has been possible since wage costs are held in check and interest rates have fallen the world over. New technology is also making labour more and more redundant. Thus, in poor countries like India, with excess labour, capital labour ratio has risen substantially and even in Indian agriculture, mechanisation is displacing labour. It is not the case that labour was to blame for the problems of the industry since only 5 per cent of the labour force is organised and able to resist. The rest of the work force is in the unorganised sector with no security of any kind. Industry has only needed an excuse in the current environment to strengthen itself further. Developments in France indicate that labour is facing problems in the advanced countries also. WTO has come in handy to make the various countries compete and allow mobility to capital. 

While it is in general desirable that goods be cheaper but it would be of advantage only if the incomes do not fall so that there is an increase in real incomes. In India, if the cost of living index which does not adequately represent the services being consumed is used, real incomes may go up but that is not the whole picture since services are under represented. Thus, while officially real incomes may be rising, actually they may be falling.

There is a further problem, namely, for many producers, like, in agriculture, prices of their products have fallen or stagnated whereas their costs have risen (for a variety of reasons) so that their real income has fallen. This underlines the increasing distress in agriculture. In the case of industry where this has happened, the squeeze has been on the workers. The rising share of property incomes in India and the world is an indication of such a squeeze.

There is a rural/urban divide in this. In the rural areas, the use of services is much less than in the urban areas. Thus, the urban poor would be affected much more by rise in service costs. Hence the rapidly falling urban poverty in the post 1991 period may be more of a mirage than the falling poverty in the rural areas. The effect on the middle classes which consumes a lot of services and specially the private ones is substantial and this is not captured by any of the price indices. In brief, the lack of representation of services in our inflation indices has meant an under estimation of our rate of price rise. This affects the poor and the middle classes adversely and has become another mechanism for the increase in the share of property incomes in national incomes by reducing the extent of indexation of wages to inflation .

OTHER MACRO VARIABLES
The lacuna in the two major macro variables, output and prices, is not an isolated instance of manipulation to show a better economic picture of the country. This is also true of the rate of capital formation and fiscal deficit in the budget. The rise in the foreign exchange reserves of the country is supposed to reflect the health of the BOP but here also recently the RBI has indicated that most of the capital inflows into the country are of a volatile nature. In Kumar (2005b) it is argued that one cannot discuss the issue of employment and poverty without taking into account the black economy. Further, in Kumar (2006), it is shown that employment is over estimated due to the existence of the black economy and poverty is correspondingly under estimated. 

In Section II, it was argued that in many cases the depreciation norms need to be higher to compensate for the damage to the environment and in places there is double counting (like, for displacement and calamities) so that actual Capital formation is lower. Further, the capital formation has been raised artificially due to the change of base from 1993–94 to 1999–2000. The reasons are the same as indicated in Section II for the growth of output (change of base years and rising under employment). Another major change is definitional. In Kumar (1999) it was suggested that precious metals should also be a part of the NAS. This change has been implemented from 1999–2000. However, this means that definitionally there is non comparability. This change has added 1.3 per cent to Capital Formation in 2004–05 (GOI, 2006: 12).

A large number of concessions have been granted to the FIIs and this has led to the reverse flow of black and illegal funds from abroad through the PN and the Mauritius routes. This is making money laundering easier since industry is passing into the hands of those who commit illegality. Today, it is becoming difficult to trace who are the real owners of many an industry. This would make black income generation easier. Thus, the rise of the foreign exchange reserves is not a cause of celebration considering the future problems. It is a part of a short sighted strategy. Data show that the Fiscal Deficit has declined. Indeed this is the case in the last few years due to a rise in the tax GDP ratio due to a rise in the direct tax to GDP ratio. In the fiscal chapter, it is shown that the fastest rising component of direct taxes is the Corporation tax and its rise is based on the rise in the share of corporate incomes in GDP. In other words, income distribution is getting more and more skewed.

This is not all. One can always lower the deficit by lowering the expenditures. There would be no problem if the cuts are in inessential expenditures and the huge amount of waste that the government indulges in. Unfortunately, neither of this has happened and the cuts have come in essential expenditures. In the fiscal chapter it is shown that the share of transfers to the States, capital expenditures, development expenditures and subsidies has declined. Further, the burden of resource raising for the public sector investment has been shifted from the budget to the public sector itself. In other words, the quality of adjustment has not been desirable. It has been argued in Kumar (1994) that in addition to the black economy, the well off get huge concessions in taxes. The Receipts budget for 2006–07 lists for the first time what these concessions on taxes were in 2004–05. These are called tax expenditures. Data presented there shows that the Corporate sector gets a concession that is roughly equal to the amount of tax it pays. The bigger companies of course corner most of it. They pay an effective tax rate which is half of what they are supposed to pay. The corporates get more than what the poor get through subsidies.

POVERTY
The above analysis of the official data on growth and inflation suggests that poverty should be higher. Growth is lower and specially for the unorganised sectors and those in the rural areas. Growth in the organised sectors has adverse effects on the poor. The destruction of the environment impacts the poor most. For instance, recycling of ships, computer waste, lead acid and plastic is done by some of the poorest people. The collection of plastics and other waste in the urban areas is done by child labour. They work in some of the most hazardous conditions without any protective gear. In fact, poverty and under employment are rampant to such an extent that progressive voices in society prefer that they get this kind of work rather than no work.

It is claimed that poverty has declined after 1991 because of the higher rate of growth in the post 1991 period. However, the rate of growth is not higher as suggested above (also Figure 1) and may actually be lower if the full impact of degradation of the environment is taken into account. Looked at another way, since some of the activities are degrading the environment and leading to greater health problems amongst the poor engaged in these activities, even a higher nominal income does not mean higher living standard since more may be spent on health. They are also spending more on transport, energy and water. Since the price indices do not reflect some of these activities, the usual definition of real wages may show a rise but the actual real wage may be decreasing. Even in agriculture, spraying pesticides in fields may be worse than digging holes and filling holes. This affects the worker’s health and the higher income is no compensation for the damage. Many people are known to have to mortgage the little property they have, to avail of health facilities or send their children to private schools.

The poor depend on the traditional sectors and as argued in Section II, these are declining because the modern sectors are expanding at their expense. Thus, the livelihood of the poor are being affected rapidly without their having recourse to any alternatives since they do not have the skills to switch to alternative avenues. They invariably become landless labourers or head load workers or rickshaw pullers, and so on. All this is aggravating poverty.

CONCLUSION
This paper shows that (ignoring the problems related to the black economy) the growth and the prices situation are not as rosy as presented by official statistics. The real level of output may be less by 25 per cent and therefore the growth rate may be closer to 6.0 per cent than 8 per cent (See Appendix). The output has been enhanced by 2 per cent due to change of base which is not taken into account here. The government has been at pains to show that the NEP have resulted in a faster growth of the economy. Two revision of the output series have been carried out, one in 1993–94 and the other in 1999–2000. Both raised the rate of growth as compared to the earlier figures. In 2004–05, the increase due to change of base is 1.9 per cent. This is more definitional than due to the faster growing sectors being assigned a higher weight.

The paper argues that the faster growing sectors are precisely the ones that have associated environmental implications and have led to waste. Why so much irrationality? It is because the fetish for growth has led to the problem being viewed narrowly with the inter connections and the implications being ignored for the sake of quick results. With the weakening of labour, it can be made to bear the costs. Further, the decline in the traditional sectors is not captured by the data. Thus, the 15 year growth path is not as robust as indicated by the official data since the rate of growth is not only less, its sectoral pattern is skewed towards the well off and the better off States.

The actual rate of inflation is higher than projected. The quality of fiscal adjustment is based on cuts in essential expenditures and rising inequity and the rising reserves are a result of substantial return flow of funds earlier transferred out of the country through flight of capital. This money is being used to create an environment of speculation in the economy which works against the interest of the poor. Finally, the black economy is continuing to grow as indicated by the growing number of scams and the rising speculative activity. Thus, the positives projected by the government do not have as much of the sheen as suggested by officialdom. GDP growth for its own sake is at the expense of the marginalised sections of the population—the poor and women—and is anti environment and wasteful. It is based on double counting of output and ignoring the decline of the unorganised sectors of the economy. The inflation rate is not representative of the price rise faced by large sections of the population hence it is pro business and the latter can use these non-representative inflation indices to keep the wages down. Inequality is higher than the statistics reveal and the poor are adversely affected but the statistics do not capture that since they are flawed.

REFERENCES
Alternative Survey Group. 2005. Alternative Economic Survey, India 2004–05: Disequalising Growth. New Delhi: Daanish Books

Baran, P. 1973. The Political Economy of Growth. London: Pelican Books

 GOI, CSO. 1999. New Series on National Accounts.

GOI, CSO. 2002. National Accounts Statistics 2002.

GOI. 2006. Economic Survey 2005–2006. New Delhi: Ministry of Finance, Economic Division.

Kalecki, M. 1971. Selected Essays on the Dynamics of Capitalist Economy. Cambridge: Cambridge University Press.

Kumar, A. 1994. ‘Proposals for a Citizens Union Budget for the Nation for 1994–95. An Alternative to the Fund Bank Dictated Union Budget for 1994–95.’ Mimeo. Presented to the Citizens’ Committee on February 12, 1994 at Gandhi Peace Foundation, New Delhi. Prepared for the Preparatory Committee for Alternative Economic Policies.

———. 1999. The Black Economy in India. New Delhi: Penguin India.

———. 2005a. ‘Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm,’ Bhartiya Samajik Chintan. January-March 2005. 3(4): 215–29.

———. 2005b. ‘India’s Black Economy: The Macroeconomic Implications,’ South Asia: Journal of South Asian Studies. 28(2): 249–63.

———. 2006. ‘Black Economy, Under Estimation of Unemployment and the Union Budget, Economic and Political Weekly (forthcoming).

APPENDIX:

Calculation of Overestimation of GDP in Some Sectors/Activities 
Calculating all the cases of over estimation of GDP mentioned in Section II is not possible here but a few specific cases are discussed below.The calculations are with reference to 1999 –2000,the year for which firm figures in the old base are available. 

Output is over estimated due to Change in Method 
Unorganised sectors are over estimated given rising under employment.Data show that between the 50th round (1993 –94)and the 60th Round (2004)of NSSO, underemployment has gone up by 50 per cent (GOI,2006: 209).Thus,approximately,5 per cent of the growth of the unorganised sectors would be over estimated.This would affect the unorganised non-agricultural sector.

Over estimation of employment due to the black economy is about 5 per cent (Kumar,2006).Since a bulk of the employment is in the unorganised sectors and that is where methodologically the impact would be the most,one may say that the output would be over estimated by 5 per cent due to this factor.*** The share of output of the unorganised non-agriculture sector in GDP is 33 per cent (GOI,2002:xlv).Thus,the over estimation of output due to these two factors would be 3.3 per cent.

Output is over estimated because damage to Environment is not factored in,in the following: 
In the case of mining and forestry,the contribution to the GDP is 3.7 per cent.There is large scale illegality and damage to the environment.If this is 20 per cent of the production,it would amount to 0.75 per cent of GDP.

Production of polluting industries like cement,metals, chemicals,packaging,leather and paper.Output of these industries in the organised sector alone would be about Rs 5 lakh crores.If the pollution created by them which they should have cleaned up is even 5 per cent of this value, then it amounts to overstating GDP by 1.5 per cent. 

Output is over estimated due to Waste in the following: 
Electricity and Water Supply contribute 2.5 per cent of GDP. Assume that 10 per cent of the output is wasted due to leakages and other problems.The value of output would be about 4 times the value added so that roughly 1 per cent of GDP would be lost on account of these leakages.

Water of poor quality and health problems (See below). The contribution of Public Sector to National income is about 15 per cent and if 20 per cent of this is wasted or is the work not done to harass the public or siphoned out, then the over estimation of GDP would be 3 per cent. 

Output is over estimated due to inadequate provision for Depreciation in the following: 
As argued,provisions of medicine and health are for the maintenance of a healthy population..Further,there are wastes due to life style diseases,etc and increases in costs due to growing pollution.Thus,a bulk of the health expenditures are like digging and filling holes.Assume that 50 per cent of the expenditures are of this nature and avoidable.Some of the public expenditures would be of the preventive kind and essential and some other expenditures are normal with aging or at birth,etc.The total expenditure on health (public plus private consumption expenditure)is 5.5 per cent of GDP.Thus the excess contribution to GDP would be 2.75 per cent. 

Output is over estimated due to Illegality in the following 
Theft of Power and additional leakages (See above).

Spurious output is generated due to production of artificial milk,adulterated food,spices and oil,adulterated diesel and petrol and spurious medicines.If 10 per cent of the value of sales of these items are taken to constitute spurious production,they would amount to 5 per cent of GDP.This would be in addition to what may be undeclared output.

 Law and order machinery to control growing criminalisation in society takes up about 2 per cent of GDP.Half of this maybe taken to be a consequence of growing social tensions hence like digging holes and filling them,that is 1 per cent of GDP. 

Output is over estimated due to Double counting of output in the following: 
Use of water purifiers,bottled water,Inverters,UPSs and stabilisers is on account of unstable power and unreliable water supply and constitutes double counting.Their output would be about 0.6 per cent of GDP and should not be counted.

Hotels and restaurants contribute 1 per cent of GDP and domestic services are 0.25 per cent of GDP.If half of all this is taken to be substitution of unpaid work then the excess contribution to GDP would be 0.63 per cent.

In Delhi,roughly 20,000 families annually have been displaced due to slum clearance in the last 5 years.This is roughly 90,000 people out of 12 million population.If this is taken to be the national norm for displacement and disasters (floods,fire,earthquake,Tsunami,etc)and projected to the national population,the figure of displacement would be about 7.2 million people or say 1.4 million families every year.If the assets destroyed in the process are worth Rs 1 lakh per family,the destruction would be Rs.14,000 crores or say 0.8 per cent of GDP. 

Miscellaneous items affecting measurement of output 
Tax on Services have added about 1 per cent to GDP at market prices to the valuation of services. Change in valuation of services like Education and Health. This is relevant largely for the private sector where the inflation has been the most.In 1999 –2000 these sectors contributed 3 per cent of GDP.If 10 per cent of this was due to inflation in costs and wages then it would amount to 0.3 per cent of extra GDP.

Almost 2 per cent of GDP has been added in 2004 –05 due to the addition of the category `Valuables ’ in the definition of Capital formation (1.3%in 2004 –05)and other changes in GDP due to base change from 1993 –94 to 1999 –2000 (0.6%in 2004 –05).

Other items which need to be calculated but could not be are related to Urbanisation,additional transportation,loss of time,use of private vehicles and pollution,extra depreciation provision for Hardware and Software,toxic waste recycling,packaging,fertiliser and pesticide use in agriculture and health problems and soil problems, Unutilised potential of dams for irrigation,etc. The items for which calculations have been done above add up to 20.63 per cent of GDP.If all other things listed add up to another 4 per cent so that we could assume that 25 per cent of GDP is overestimated then (assuming this component to have 0 per cent rate of growth and not the normal rate)that would shave off 2.0 per cent of the 8 per cent rate of growth and it would be closer to 6.0 per cent. The GDP would also be lower by 2 per cent that is added (over 5 years)due to the change of base but this is not being taken into account here.Otherwise the rate of growth would come down to 5.5 per cent.The effect of the true rate of growth being lower than the official rate of growth would show the real impact on the poor and the middle classes since many of the items which are the cause of this lowering relate to the effects on them (See Section V).The well off are the real beneficiaries as the rapid rise in Corporate profits and the black economy indicate. 

Courtesy: AES, Daanish Books

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