The need to go beyond GDP figures

The Central Statistical Organisation (CSO) recently released the GDP data to record a growth rate of 7% in the third quarter of financial year 2016-17. Economists expressed disbelief in the declared growth rate taking into account the demonetisation move which had removed 86% of currency in circulation. It would have affected the aggregate demand adversely, logically leading to a slowdown in output which would affect GDP growth.

Controversies loomed around the CSO earlier in 2014-15 when it had attempted a new method to calculate GDP by adopting a new base year, shifting it from 2004-05 to 2011-12. Critics opined that the CSO had used the new method to hype the growth rate and distort the reality associated with it.

Until the second half of the 1980s and more precisely till the introduction of economic reforms in 1991, the country had been witnessing the so called ‘Hindu growth rate’ which hovered around 3% and therefore, never attracted much attention. 

Jawaharlal Nehru as prime minister opted for a socialist command economy model and the country’s growth rate was never benchmarked with other nations. Growth was hardly the central issue in the political discourses and the major emphasis was on development of the public sector entities.

However, in the post-liberalisation period, which coincided with the rise of the BJP as a national alternative to the Congress, the rival political formations began to use GDP figures as report cards of their fiscal policies. In the early 1980s, the GDP crossed the ‘Hindu growth rate’, a trend which continued into successive decades.

Thereafter in the 1990s, both the Congress and the BJP realised the political mileage that accrues from the GDP which would in turn trumpet the success of their fiscal management and policies.

The US policy makers conceived the concept of GDP in 1937 as a useful signpost for the government to run its fiscal policy. The GDP growth reflected increased economic activity, job creation, higher income and provision of basic amenities. Most importantly, it gave the government the tool with which it could decide on the appropriate tax rates for its people and to alter its policies related to armament production.

Importantly, the GDP growth rate is merely a computation of output growth and not an indicator of the overall welfare of the people. Any method used to calculate the GDP only provides a figure to represent income growth -- rather than an increase in well-being which is qualitative. To measure improvement in welfare, the government needs a much more comprehensive analysis like the human development index (HDI), gender equality index, poverty index and not to forget the happiness index.

The paradox is that India, one of the fastest growing emerging market economies with a GDP of $2 trillion, ranks 130 among 188 countries in HDI. Therefore, it is important for an emerging economy like India to focus on human development rather than only on the volume of output in terms of GDP. Also, economists opine that both growth and development complement each other.

‘Data-poor country’
Lately, the Opposition has raised concerns over the veracity of the GDP figures. The challenge is to comprehend that in a ‘data-poor country’ like India, it is very easy for governments to claim success or failure of their policies based on statistics.

The methodology to calculate GDP is not all inclusive, it heavily depends on the data that is collected and processed without taking into consideration the data that is unavailable and hence unaccounted during this exercise. Besides, the current figures are indicative of the formal sector of the economy. The informal sector which makes up almost 45% of the GDP is not factored into calculations.

Perhaps the cash crunch did not impact the GDP figures because its impact on the informal sector of the economy which relied on exclusively on cash transactions was greater. This sector was even otherwise not factored beyond a small extent in GDP calculations. Although the demonetisation impacted the formal sector of the economy, the shift to cashless transactions proved smoother than expected.

Lastly, the rise in indirect tax collection compensated the reduction in the Gross Value Added. Perhaps, this explains how the gap between predicted GDP figures and those released now has been bridged. To that extent, the data collected to compute the GDP could prove correct, at least till results for the next quarter are announced.

Today GDP figures are no longer viewed as mere economic indicators but political parties also use it for political mileage. Whatever the anomalies that exist in the current methods of calculation therefore merit revision. Importantly, the GDP data needs to factor in indicators of human welfare to be useful in policy formulation.

Clearly, the GDP data has its limitations to truly reflect the overall well-being of the citizens. Policy makers now need to transcend GDP and attempt comprehensive assessments to ascertain the effectiveness of their programmes. This will enable them to view decisions and policies with greater objectivity.

(Joshy is Head, Department of Economics, Christ University and Xavier teaches Economics at Christ Junior College, Bengaluru)