Some economic misconceptions need to be countered

In popular discussions, especially in social gatherings, one comes across a lot of misconceptions about economic matters. Here are some:

One, the growth rate of GDP (or national income) is of mere academic interest and is of no concern for the common people.

This is wrong. To see how growth rate matters, consider a situation where GDP is growing at the rate of 3.5% per year (the so-called 'Hindu growth rate' under the earlier 'licence-permit raj') and the population is growing at 1.5% a year. In that case, the per capita income would be growing at the rate of only 2% per year, and it would take 36 years for per capita income to double.

If GDP growth increases to 7.5% per annum (roughly, the average GDP growth rate after economic liberalisation), per capita income would shoot up to 6% per year and it would double every 12 years. So, over the same span of 36 years, at 7.5% GDP growth rate, an average person would experience an 8-fold rise in per capita income, instead of a mere 2-fold rise under a 3.5% GDP growth scenario. So, clearly, GDP growth rate matters hugely for the average person's income and living standard.

Two, in India, especially after economic liberalisation, the rich are getting richer and the poor are getting poorer.

The first part of the statement is correct, but not the second part. Whichever measure of 'poverty line' is taken (there are several alternative ones), the percentage of 'poor' people (the so-called 'poverty ratio') is going down over time, and the rate of reduction in 'poverty ratio' has generally been higher when GDP growth rate has been high. It does not mean that all poor people are becoming better off or some people, rendered destitute by crop failures, are not committing suicides.

We are only talking of the average picture. In fact, though most rich people are becoming richer, a few rich persons (like Vijay Mallya?) may have become poorer. It is also true that income distribution (that is, the gap between the rich and the poor, according to most measures) is becoming less equal with a higher growth rate of GDP.

Three, the government fudges data on inflation and GDP to paint a false rosy picture. As proof, some say that when they go to the market, they see prices rising, while the government is talking about a fall in inflation. This misconception arises because many people fail to distinguish between the price level and the rate of change in the price level. Consider a situation where the Price Index (which measures the average of prices of many goods and services) goes up from 100 to 110 over one year, which means an inflation rate of 10%. But next year, it goes up to 115. Prices are clearly rising, but the rate of inflation has come down from 10% to 4.54% ((5/110) x 100).

Also, there are several alternative measures of inflation, like Consumer Price Inflation, Wholesale Price Inflation, Food Price Inflation, Core Inflation (which leaves out the prices of food and energy) which would yield different numbers. For example, there have been times when we had fairly high Food Inflation but negative Wholesale Price Inflation.

Regarding GDP numbers, it is true that the initial estimates are often revised upwards or downwards later. But this is primarily because more statistical information becomes available as time passes (especially true for data about the informal sectors) and generally not due to intentional fudging by the government.

To take an example, the initial estimate of a lowly 4.7% growth in 2013-14 (the last year of UPA regime) was subsequently revised upwards in 2015 (during the NDA regime) by an unprecedented 2.2% to 6.9%, which is a highly respectable number. This shows that the substantial revision (by a rival government) was a genuine one, dictated by the availability of additional information (or rather, in this case, a change of base year for GDP measurement), rather than manipulation.

Pro-rich, jobless growth

Four, even if GDP is growing, there is no job growth. In addition, the kind of growth we are having (malls and luxury high-rises) is entirely pro-rich.

It is true that job growth in the organised sector has slowed down. The so-called 'jobless growth' phenomenon is a problem not only in India but in many parts of the world and is largely attributed to labour-saving technological progress. The employment data in India - especially in agriculture and the unorganised sectors - is not reliable. As anecdotal evidence, all of us know how difficult it is to get a mason, electrician or plumber for small house jobs as they find job opportunities elsewhere in larger construction and maintenance projects.

The malls and high-rises, even if they primarily cater to the needs of relatively affluent sections, do create jobs for ordinary people like construction workers, plumbers, electricians, carpenters, security guards, car drivers, domestic help and food court workers. Though the wage rates and other benefits of many of these workers are not high, more people in a family are able to get such jobs, which implies that the family income goes up faster than the wage rate. Consequently, many of these people
(some even having 'below poverty line' (BPL) cards) in the cities are able to buy two-wheelers, colour television sets and refrigerators by pooling their family savings.

However, landless workers and marginal farmers, without any other marketable skills, are still not able to get the benefits of higher growth and continue to live a life of absolute poverty. In fact, how to shift such people from underemployment and low productivity occupations (60% of the total workforce is employed in agriculture, but they produce only 15% of GDP) to higher productivity/income jobs, rather than outright unemployment, is the matter of biggest concern in India.

(The writer is a former professor of Economics, IIM-Calcutta)

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