Shantanu Nandan Sharma that use of proxies and surveys for calculating the productivity of informal sector does not work during a crisis like Covid. Edited excerpts:
How should companies and investors read quarterly GDP numbers of the Covid period since distortions are unusually large?
Growth rates are very sensitive to what you are measuring them on. If there was an abnormally bad period earlier and you are taking that as the base, then everything will look good. And if you are comparing data with a very good period, then it will look bad. So growth rate data is okay in normal circumstances, but whenever there is a large diversion from a trend, then growth rates can be very misleading.
How should one read those numbers?
In a situation like this, it is always better to track absolute GDP figures, meaning the level. The problem is we are so conditioned to look at the growth rates that we tend to forget the context. For example, the first quarter of the next year will be a large positive because of low base. The right way to look at the GDP level of Q1 of 2021-22, for example, will be to compare it with the same period of 2019-20. The idea is, you go back to the nearest normal to compare. In certain cases, the lag could even be two years or more. As long as you are on a trend, the GDP growth is a good indicator of the economy. But when the direction itself is changing — positive is getting negative or negative is getting positive — then this number becomes problematic. You then have to compare it with an appropriate period.
Can you give a few examples?
India experienced such turbulence in the 1960s and 1970s, though not of this magnitude, when we had bad monsoons. Agriculture was very important to the economy then. Latin America saw such turbulence and distortion in the economy.
The Mexican crisis (triggered by a sudden devaluation of the peso in 1994) is a classic example. Then there was the East Asian crisis of 1997. In all such situations, comparison was level to level of GDP, not of growth rates.
How accurate are our economic indicators compiled during the Covid period? Often, proxies are used to measure our informal sector. For example, in the case of unorganised manufacturing sector, we use the Index of Industrial Production; in trading sector, which is pretty large, we use the easily available GST data. In some cases, employment data is used. For calculating the informal sector, surveys are used. But those proxies may not be very accurate during this sort of a pandemic. That is why many of us believe that the unorganised sector, in fact, suffered more than what was captured in the GDP data of the first two quarters. Both Q1 and Q2 figures are better than actualities.
How reliable are various projections being released by national and international agencies?
All projections are reasonably accurate in normal circumstances. They use certain models. All economic models assume continuity, meaning things are moving as a trend. It is a movement, up or down, but nothing dramatic. But the moment there is a discontinuity, like the lockdown or demonetisation, the same models break down. And then the forecasts are not reliable at all.