Controversy over household income: The heated-up debate is a salutary development

Lively debate on controversial PCI numbers-Sunday 09th March 2014 My Vie in this series t o ee!s a"o on #$vera"e income o% a Sri Lan!an& 'hen numbers "athered %rom to( and bottom do not tally)* +available at& htt(&,, -%t-l!,2014,02,24,avera"eincome-o%-a-sri-lan!an- hen-numbers-"athered-%rom-to(-and-bottom-do-not-tally, . has evo!ed a number o% comments %rom several critical readers/hese

readers0 includin" a %e re(uted economists0 had contacted this riter by email and on the tele(hone to e1(ress their reservations on the ar"uments (resented in the article- /hey had (ointed out one im(ortant as(ect hich this riter had omitted to clari%y but contributes to ma!e the 23P (er ca(ita income or PCI di%%er %rom PCI derived %rom household income and e1(enditure surveys !no n as 4I5Ss- /hat is0 23P PCI includes undistributed cor(orate (ro%its hich are not a (art o% the household income derived %rom 4I5Ss/hey also had surmised that in %ield surveys0 there is a normal tendency %or (eo(le to hide their true incomes- $s a result0 they have reasoned out0 4I5S PCI should naturally be on the lo side- 4ence0 on balance0 23P PCI should be hi"her than the 4I5S PCI0 contrary to hat this riter had (resented in his article- Some had ar"ued that this "a( had been there in all the countries includin" Sri Lan!a im(lyin" that it does not (ose a serious issue relatin" to the

credibility o% the statistics (ublished by Sri Lan!an authorities/he Central 6an! too enters the %oray /he article had attracted the attention o% even the learned 3irector o% Statistics o% the Central 6an!- In a re7oinder (ublished in this (a(er last ee! he had as!ed the 8uestion #Should 23P (er ca(ita be e8ual to (er ca(ita in household income and e1(enditure survey9* and "one onto ans erin" the same in the ne"ative +available at& htt(&,, -%t-l!,2014,0:,0;,should-"d(-(er-ca(ita-be-e8ual-to-(erca(ita-income-based-on-household-income-and-e1(enditure-survey, ./his riter considers that the "eneration o% a debate on im(ortant economic issues amon" the members o% the civil society and also ith o%%icials res(onsible %or inter(retin" economic numbers is a salutary develo(ment- Such debates ill leave both the debaters and all other interested readers iser and better in%ormed eventually'ron" (ractices in the (ast do not 7usti%y their continuation in the (resent /he 3irector o% Statistics o% the Central 6an!0 a re(uted economist himsel%0 had raised %our (oints0 three o% hich had been raised by other readers as ell- 4is %inal (oint had been that 23P PCI had been hi"her than 4I5S PCI even hen the 23P numbers had been estimated by the Central 6an! durin" the time this riter had been em(loyed by that "lorious institution- 4ence0 had there been an overestimate o% 23P0 both this riter and the Central 6an! should be ready to ta!e at least a (art o% the blame/he im(lication o% this last (oint has been that i% a ron" thin" had been (ractised by the Central 6an! in the (ast0 there is nothin" ron" in continuin" ith it in the (resent as ell/his as not hat this riter e1(ected by raisin" the issues involved as conveyed in the last (ara"ra(h o% his article- 4e said that <$ll these (lans +that is0 (lans to double PCI and ma!e Sri Lan!a a = 100 billion economy. ill become senseless i% the total income and PCI underlyin" that income have been overestimated and need a correction do n ard as re%lected by the # orm*s eye* calculation o% the country*s income and out(ut- /his is (erha(s a "ood research to(ic %or researchers and analysts to underta!e>In %act0 in many countries0 such research has been underta!en as as also (ointed out by 5conomist 3ileni 2une ardena o% Peradeniya ?niversity relatin" to India in a comment on a ebsite hich had re(roduced this riter*s articleSocieties stand to "ain by critically a((raisin" the (revailin" isdom Societies "ain isdom ith ne in%ormation and ne !no led"e- $ learnin" society al ays ma!es a humble attem(t at recti%yin" (ast mista!es once those mista!es have been brou"ht to its notice- It does not mean an erosion o% di"nity but a "ain o% isdom %or %urther (ro"ress- In this conte1t0 this riter has not been the only (erson ho has raised the issue relatin" to the "a( bet een 23P numbers and %ield survey numbers/he Princeton ?niversity based 6ritish economist $n"us 3eaton0 a (otential @obel Laureate accordin" to some0 has been in the %ore%ront o% research into this issue- In a (a(er 7ointly authored ith Valerie AoBel and (ublished in the 200C Dall Issue o% 'orld 6an! Eesearch Fbserver under the title #3ata and 3o"ma& /he 2reat Indian Poverty 3ebate0* 3eaton and

AoBel have observed that in India in 1990s0 national income %i"ures have sho n a %aster "ro th in consum(tion than those revealed in %ield surveys- /he corollary has been that India*s (overty has declined dramatically accordin" to 23P numbers but not accordin" to %ield survey numbers- /hen0 it as a vindication o% the economic re%orms underta!en in the country in early 1990s/hose ho had su((orted economic re%orms have tended to acce(t national account numbers0 hile the o((onents have believed in survey numbers- 6ut the im(lication had been that India*s (overty had been underestimated by national account numbers and needed a revisionSurvey data are not discredited at all times as claimed by some Many readers includin" the Central 6an!*s 3irector o% Statistics had e1(ressed doubts about the validity o% %ield surveys- /he "eneral belie% is that surveys %ail to elicit true in%ormation and are characterised by a hi"h sam(lin" error- /hose ho have these doubts should read a (a(er (ublished in 19GG by 6-S- Minhas0 Indian economist and one time member o% the Indian Plannin" Commission in the Indian Hournal San!ya under the title #Validation o% Lar"e Scale Sam(le Survey 3ata& Case o% @SS 4ousehold Consum(tion 51(enditure*In this (a(er0 Minhas has care%ully laid out the case that there is no basis %or such doubtsMinhas has been very critical o% the (ractices o% the Indian Plannin" Commission0 but the very same Plannin" Commission had in all humbleness chan"ed its (olicy o% addin" u( to the survey data numbers to match the hi"h 23P estimates on the basis o% critical comments made by himSo clearly0 instead o% de%endin" the current (ractices tooth and nail0 Sri Lan!a should "o into ne research on the controversial numbers as this riter had su""ested- @o bac! to the comments madeMany di%%erences in estimatin" 23P and derivin" survey statistics Fne o% the comments that the "a( has been there in all the countries is related to another comment that 23P PCI includes undistributed cor(orate (ro%its hereas 4I5S PCI does not/his riter has dra n the attention o% the readers to the methodolo"ical di%%erences bet een the t o ty(es o% numbers& Fne is #bird*s eye* hile the other is # orm*s eyeI one is indirect estimates hile the other is direct data "atherin"I one is value added hile the other is all cash and non-cash recei(tsI one is one-time countin" hile the other is multi(le countin"6ased on these di%%erences0 this riter ar"ued that 4I5S PCI should be hi"her than 23P PCI4o ever0 one im(ortant element omitted by this riter is the inclusion o% undistributed (ro%its o% cor(orate entities in 23P data- $ccordin"ly0 the issue boils do n to a sin"le element- /hat is0 undistributed cor(orate (ro%its ma!e 23P PCI bi""er- Similarly0 multi(le countin" and inclusion o% all ty(es o% recei(ts ma!e 4I5S PCI bi""er- Since a household is a household in both national accounts and %ield surveys0 hat should be bi""er ill %inally de(end on the relative siBe o% the t o se(arate additions2overnment and @2F e1(enditure too mostly end u( in household income /he Central 6an!*s 3irector o% Statistics has re%erred to t o other areas that mi"ht ma!e 23P PCI bi""er than the 4I5S PCI- /hey are the o(erations o% non-(ro%it @2Fs and those o% the "overnment in (ublic services li!e education0 health and national de%ence- 4e has (ointed that these t o o(erations are included in national account calculations and not in the household incomes- 6ut accordin" to the ?@ System o% @ational $ccounts0 o% hich 3CS %ollo s the 199: edition and not the latest 200G edition as disclosed by the 3irector o% Statistics0 both these o(erations are valued at cost0 that is0 ithout a (ro%it element0 %or 23P (ur(oses$ll e1(enses incurred by @2Fs and the "overnment by ay o% (ayin" salaries and a"es0

(urchasin" o% services and materials and so %orth ill become household income as ell- Dor instance0 i% the "overnment (ays salaries to a teacher or a doctor or a soldier in (rovidin" common services li!e education0 health or de%ence0 they are both in the 23P and the household income- $s such0 they do not ma!e a di%%erence either number- 'hat is dis(uted is hen the "overnment or @2Fs ma!e (ayments to cor(orate entities/here a"ain0 those entities use hat they "et %rom the "overnment or %rom @2Fs to (ay salaries0 a"es and (urchase materials and services %rom households and unincor(orated business entities- /hey too there%ore become household incomes- 5ven hen they ma!e (ro%its0 to the e1tent those (ro%its are distributed0 they still become household incomes- 'hat is not in household income and only in 23P is the undistributed (ortion o% their (ro%its- 6ut that should be a ne"li"ible (art o% the total "overnment or @2F e1(endituresIn the case o% "overnments0 the almost entirety o% the "overnment e1(enditure is (aid out to households by ay o% salaries0 (ensions0 com(ensations0 direct subsidies and (urchase o% services and so %orth- $ll these are included in household income because it is made u( o% all recei(ts0 similar to the credit side o% the cashboo! o% an individual as clari%ied by this riter6ut not all "overnment e1(enditures come into 23P numbers- Fne "ood e1am(le is (ension (ayments and subsidies hich are called unre8uited trans%ers and there%ore not a value addition to the economyI% (ro%its are added0 losses should be subtracted /hus0 o% the cor(orate (ro%its0 as ar"ued above0 only the undistributed (ortion ill ma!e the 23P PCI bi""er than 4I5S PCI- 'hat is re%erred to as cor(orate (ro%its here is de%ined in ?@ S@$ as #o(eratin" sur(lus*0 as (er the value added conce(t used in estimatin" 23P- It is arrived at by valuin" the out(ut at the (revailin" mar!et (rice called the basic (rice and deductin" %rom it the value o% in(uts used and (ayment o% salaries and a"es to or!ers$ccordin" to ?@ S@$ 200G +( 1:2.0 <It measures the sur(lus or de%icit accruin" %rom (roduction be%ore ta!in" account o% any interest0 rent or similar char"es (ayable on %inancial assets or natural resources borro ed or rented by the enter(rise0 or any interest0 rent or similar recei(ts receivable on %inancial assets or natural resources o ned by the enter(rise>$ccordin"ly0 (ro%its made by cor(orate entities ill enhance 23P hile losses ill do the o((ositeState enter(rise sector is one bi" loss ma!er /he overall (osition o% Sri Lan!a*s State F ned 5nter(rises or SF5s has been a massive #o(eratin" de%icit* in the (ast- $s re(orted in the Discal Mana"ement Ee(ort o% the Ministry o% Dinance %or 2014 +(( J;-G.0 the non-ban! SF5s have made o(eratin" losses o% Es- 11: billion and Es- 1C4 billion in 2011 and 20120 res(ectively- 4o ever0 the State o ned %inancial institutions have made o(eratin" sur(luses o% Es- 4C billion and Es- 44 billion res(ectively in those t o years- 6ut the overall (osition has been that o% o(eratin" losses amountin" to Es- JG billion and Es- 110 billion in the t o years under re%erence'hat this means is that SF5s have (aid out more to the households %or (urchasin" in(uts and labour in these t o years than retainin" anythin" ith them- /hus0 the o(erations o% SF5s have resulted in a contraction o% 23P but an enhancement o% the household incomes- /hus0 as %ar as the SF5s are concerned0 there is no reason %or 23P PCI to be hi"her than the household PCIPrivate cor(orate entities too do not ma!e bi" (ro%its It is there%ore0 the o(erations o% the (rivate cor(orate entities that should ma!e a di%%erence/hou"h Sri Lan!a has some :00000 limited liability com(anies0 only a hand%ul o% them (ublish

their %inal accounts on time- ?nli!e in develo(ed economies here the statistical a"encies conduct com(rehensive surveys0 Sri Lan!a has to do limited surveys to "ather data in vie o% the constraints in %undin"- 4ence0 its surveys do not cover the entirety o% the cor(orate sector o% the countryFne may there%ore use a re(resentative number comin" %rom the Colombo Stoc! 51chan"e$ccordin"ly0 the total (ro%its0 not the o(eratin" sur(lus as de%ined in ?@ S@$0 made by the com(anies re"istered ith the Colombo Stoc! 51chan"e numberin" 291 as at the end o% 201: should serve as a "uide to any layman to ma!e 7ud"ment o% the o(erations o% the cor(orate (rivate sector in the country- /he overall (ro%it levels o% these com(anies in 2011 have been Es1:4 billion and in 2012 Es- 1:J billion- /hese are the total (ro%its and not the retained (ro%its'hen the losses o% SF5s are set o%%0 the value addition to 23P contributed by this so-called retained (ro%its amounts to Es- JJ billion in 2011 and Es- 2J billion in 2012/he undistributed (art o% those (ro%its must still be lo er- /hen0 23P PCI could be hi"her than 4I5S PCI i% and only i% the "ross recei(ts o% households constitutin" multi(le recordin" o% all recei(ts are lo er than the undistributed com(onent o% these numbers- 6ut that has to be veri%ied throu"h %urther research and not by ma!in" s ee(in" statements/he idenin" "a( bet een 23P PCI and 4I5S PCI It a((ears that many are o% the vie that since there is a "a( bet een the 23P PCI and 4I5S PCI and the %ormer is lar"er than the latter0 there is no (roblem %or Sri Lan!a- /his "a( has been due to0 as claimed by the 3irector o% Statistics o% the Central 6an!0 the undistributed (ro%its o% the cor(orate sector hich are included in 23P- In other ords0 it is due to the non(ayment o% dividends by the cor(orate entities to their shareholders$ccordin" to the numbers in the (ast %e years0 the "a( bet een the 23P PCI and 4I5S PCI has been risin"- In 200C0 the "a( as 2-4 times and in 2012 it had increased to :-1 times- /hus0 cor(orate entities a((ear to be retainin" more and more (ro%its ith them instead o% distributin" the same to shareholders2overnment (olicy is to (romote dividend (ay-outs /his trend is contrary to the "overnment (olicy on the (ayment o% dividends- In the 6ud"et S(eech 200;0 the Minister o% Dinance havin" been dissatis%ied ith the non-(ayment o% dividends by com(anies in ade8uate amounts0 had insisted that com(anies should ma!e a dividend (ay-out o% at least C0K o% their distributable (ro%itsI as a deterrent to the (ractice o% not (ayin" even one third o% distributable (ro%its0 the Minister had (ro(osed to im(ose a ta1 o% 1CK o% the di%%erence bet een the rate (aid and the minimum rate o% one third hich they should (ay +( 1:.4o ever0 i% 23P data are a %air estimate as claimed by o%%icial sources0 they denote an unsavoury develo(ment- /hat is0 their risin" %aster than 4I5S data sho s that com(anies are !ee(in" more and more (ro%its ith them ithout distributin" amon" shareholders thus %rustratin" the ishes o% the "overnmentFnce a"ain it is em(hasised that these %acts (resent rich ra materials %or %urther research and studies by concerned economists and researchers+'-$- 'i7e ardena0 a %ormer 3e(uty 2overnor o% the Central 6an!0 can be reached at a 1949L"mail-com-.