The world over, economic growth is almost always measured in terms of GDP figures. Simultaneously, a school of thought has emerged that the GDP way of measuring growth hides more than it says.
Mr M R Sivaraman
IAS (Retd), Former Revenue Secretary, Govt of India & Former Executive Director, IMF
I have dealt with government finance for several decades, both at the state and national levels, as well as at the international level. Is it right or wrong to measure growth using GDP? In my view, it is both right and wrong. GDP is a process that continues over several years. For example, according to ‘The Economist,’ the 1959 GDP of the United Kingdom is still undergoing revision. The measurement of GDP, or rather its compilation, is an extraordinarily complex and difficult process. The United Nations has a manual for this purpose, prepared with contributions from almost all countries, including India. The Director General of the CSO is always a member of that committee. They have a 2008 manual which is still being revised.
The GDP, or gross domestic product, now includes services as well. Many Western countries derive more from services than from goods. So, GDP encompasses both goods and services. There has to be some measure of what is being produced in the country, and GDP serves that purpose. It was Sir William Petty, one of the ancient economists of the United Kingdom and a doctor, who started the concept of GDP in 1660. He estimated the UK’s GDP at 40 million pounds. Now it is 1 trillion pounds, showing significant growth and improvements over time.
It was Dadabhai Naoroji who first assessed India’s income in 1876 by estimating agricultural income and adding a certain percentage to it. However, the technical process of compiling GDP was undertaken by Dr. VKRV Rao, the founder of the Delhi School of Economics. His PhD thesis at Cambridge focused on the national income of British India in 1931-32. In the last several years, numerous refinements have been made to GDP. It comprises wages, interest, rent, and profits.
Different Perspectives
From a production perspective, it represents the goods and services produced. From an expenditure viewpoint, it encompasses consumer spending and government investment. GDP is not a precise estimate and continuously changes as new data emerges. Hence, the UN Committee on national income regularly revises it as they gather more information.
In the digital age, many free services are provided, but it’s unclear if they are included in GDP calculations, and if so, whether they are accurately accounted for. Consider services like those provided by the internet and WhatsApp. Sending a letter via courier may cost Rs 85, but using the internet incurs no cost. Determining the value addition in such cases is complex. While one might argue it’s worth Rs 85, it’s not reflected in GDP.
There’s no accurate evaluation of the services rendered by the government to various agencies. Take defence, for example. While the salaries paid to defence personnel are considered in GDP, it’s challenging to evaluate the contribution of someone who dies on the battlefield. There are numerous other services provided by the government, such as constructing parks to improve the environment. What about the services provided by housewives? They cook food and attend to various chores inside the house, yet their contributions are not typically valued in GDP calculations. Similarly, if you self-drive a car, you provide a value addition. However, if you employed a driver, you would have paid them a salary. These are some of the serious deficiencies observed in GDP measurements.
Per Capita GDP Doesn’t Reflect Reality
India’s GDP is estimated at 310 lakh crores at the end of February 2024, according to a report. However, simply dividing this figure by the population to calculate per capita GDP doesn’t provide meaningful insights. Per capita GDP fails to depict how the poor are living and does not reflect income distribution. This is a major flaw in GDP calculations. It does not illustrate how various income groups in the country benefit from the production processes within the system.
The French Government established the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP) in 2008, commonly known as the Stiglitz-Sen-Fitoussi Commission. Members included Dr. A K Sen and Bina Agarwal from Delhi University. Their report highlighted numerous deficiencies in using GDP as a measure. They emphasized that GDP does not accurately reflect the welfare that people experience in society.
MPI Index and HDI Index
One of the most significant developments in recent times is the creation of the Multidimensional Poverty Index (MPI). NITI Aayog is also involved in this endeavour. The Human Development Index (HDI) report, which was released very recently, classifies countries based on their HDI index. The global MPI utilises 10 indicators covering three key areas: health, education, and standard of living.
In terms of health, indicators include nutrition, child, and adolescent mortality rates. Infant mortality has substantially decreased in India, with states like Tamil Nadu and Kerala achieving international standards. However, many states still lag behind, a disparity not reflected in GDP figures.
The education dimension of MPI encompasses years of schooling and school attendance, which vary significantly across India. In Bihar, for instance, the average years of education range from 6 to 7 years, while in some cases it may reach up to 12 years. In contrast, in southern states, the average number of years of education for both men and women is around 12 to 14 years. This disparity serves as a crucial measure of the welfare of the people, highlighting the need for a more nuanced understanding beyond GDP.
The standard of living dimension of the MPI includes indicators such as housing quality, household assets, access to basic amenities like sanitation, drinking water, and electricity, as well as the type of cooking fuel used. These aspects of living standards are not captured by GDP. The MPI is managed by NITI Aayog, and they recently released a report indicating that only 11.28% of the population is below the poverty level. However, this estimation is based on mathematical extrapolation rather than actual surveys. The data was derived from the National Family Health Survey, the fifth round, conducted in 2019-20. Some economists may object to this method and suggest conducting more direct surveys to obtain accurate poverty estimates.
Gross National Happiness
While India utilizes the Multidimensional Poverty Index (MPI), other countries have also developed alternative measures of well-being. For instance, Bhutan introduced the concept of Gross National Happiness (GNH), which considers factors beyond economic indicators. GNH includes per capita income, health and life expectancy, social support, freedom to make life choices, capability and trust in government, among others.
The United Kingdom conducts a Personal Wellbeing Survey annually, which incorporates 59 indices to gauge the well-being of its citizens. These initiatives demonstrate a broader recognition of the limitations of GDP as a sole measure of societal progress and the importance of considering multiple dimensions of well-being.
Puzzling Conclusions
The conclusion that people in Afghanistan, Pakistan, Iran, and Somalia are happier than those in India is indeed puzzling, and the methodology behind such a claim remains unclear. Often, such assessments rely on subjective measures of well-being, which can be influenced by various cultural, social, and economic factors. One important dimension of well-being in society is social support networks. In Great Britain, over 8 to 10 adults feel they have people in their lives to rely on, in times of serious problems. This aspect of well-being is not captured by GDP. Conversely, in societies like those in Scandinavia, issues such as loneliness and suicide rates can be influenced by weather conditions and other factors. Again, these factors are not reflected in GDP measurements. In the United Kingdom, trust in the government remains at 65.9%, indicating a certain level of confidence in public institutions.
Regarding life expectancy, India’s figure, as per the Human Development Index, stands at around 67 years, but it has reportedly improved to 70 years.
The Organisation for Economic Cooperation and Development (OECD) conducts surveys similar to those carried out by the British government, providing valuable insights into various dimensions of well-being in different societies. These surveys offer a more holistic view beyond economic indicators like GDP.
Mr Arun Kumar
Retd Prof of Economics, JNU
International agencies support the notion that India is experiencing rapid growth, but they are not independent data-gathering bodies. They rely on official data and consequently replicate errors present in our GDP data. The aggregate of economic activities generating income for citizens is referred to as national income. Given the vast diversity of the economy, estimating it accurately is challenging. Moreover, the economy is undergoing rapid technological changes, further complicating the assessment. Today’s cars vastly differ from those of 20 years ago, just as typewriters differ from the computers we now use for typing.
Three Broad Areas
Estimating national income involves various methods, one of which entails considering the production of goods and services within the economy. Due to this economic diversity, GDP is segmented into different sectors, each further subdivided into industries. These sectors, namely primary, secondary, and tertiary, represent broad areas. The primary sector involves natural resources, while the secondary sector encompasses activities built upon these resources, such as the transformation of sugarcane into sugar. Finally, the tertiary sector handles the distribution of the entire production, including finance, trade, and other services. In essence, the primary, secondary, and tertiary sectors constitute one division, which is further delineated into nine major sectors.
Each major sector itself is diverse. Agriculture alone can involve up to 200 different crops, while mining encompasses a wide array of metals and minerals. Consequently, we require different methods to measure the contribution of each sector to the GDP. We must subtract depreciation to arrive at the net domestic product, from which we derive the idea of national income. The distinction between domestic and national income lies in the former representing activities within the country and the latter also encompassing earnings from outside the country.
Does GDP measure the welfare of citizens? The distribution of income across different groups of people is not captured by GDP measures. The earnings of a poor person versus a rich person differ vastly. Hence, GDP doesn’t adequately represent the welfare of everybody; it’s an average that doesn’t account for everyone. Additionally, certain activities that enhance citizen welfare are not included in GDP calculations. Ordering food from outside increases GDP, but the same food cooked at home doesn’t. This discrepancy poses challenges in accurately assessing welfare.
Reliability of Data & Method
GDP is merely an estimate; it’s essential to remember that we don’t directly report our income or individual production. Instead, we have to estimate it. However, this estimation process faces challenges. Firstly, the data may be inadequate. Secondly, the method used to estimate based on that data must be carefully considered. If the data is insufficient or inappropriate, the method used must compensate adequately. In essence, the issue with GDP arises from both the inadequacy/inappropriateness of data, and the methods used to interpret it.
To provide a further overview of the Indian situation, we receive two types of GDP data: annual GDP and quarterly GDP. Quarterly GDP relies on limited available data for the quarter, often involving rapidly changing data that must be processed quickly. Conversely, annual data aggregates quarterly data and undergoes revision. This dichotomy in data collection methods adds another layer of complexity to accurately gauging the economy’s performance.
The problem that has emerged in the Indian economy since 2016-17, with the implementation of demonetization, is significant. Such shocks not only impact the economy directly but also exacerbate issues with data collection and methodology. This raises questions about the accuracy of the current claimed rate of economic growth by the government.
Multiple Shocks to Economy
Growing disparities pose challenges for GDP measurement. Presently, the pattern of growth in the Indian economy resembles a “K” shape, with the organized sector thriving while the unorganized sector declines, in my assessment. Since 2016-17, the economy has faced multiple shocks, including demonetization, the GST rollout, the NBFC crisis in 2018, and the 2020 lockdown. These shocks have disproportionately affected the unorganized sector, yet the damage remains unaccounted for in official data.
Using organized sector data to measure the unorganized sector is flawed. This practice skews GDP data by approximating a declining sector with data from a growing sector. Even in agriculture data, reliance on targets can lead to inaccuracies, as these targets are often not met. Additionally, out of 39 sub-sectors in the unorganized sector, 29 are measured using organized sector data, further distorting the picture. Consequently, this flawed methodology results in an upward bias in GDP data, undermining its accuracy.
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Take, for example, the impact of demonetization. Official data during the demonetization year of 2016-17 showed the highest GDP growth rate of over 8% in the decade from 2010 to 2020. However, this seemingly positive figure belies the reality of the situation. From November 2016 onwards, until the end of 2016-17, the economy suffered significantly. Perishable goods such as fruits, vegetables, and flowers rotted in the fields, leading to substantial losses. For instance, in Azadpur mandi of Delhi, the largest wholesale market, less than half of the usual quantity of fruits and vegetables arrived. These challenges indicate that the economy actually experienced a decline during 2016-17. However, due to methodological issues, the data reflected the highest growth of the decade.
Decline of Non-Corporate Sector
From the first quarter of 2017-18, the growth rate plummeted rapidly, as shown in official data. If the unorganized sector data were included separately, the growth rate would likely have dropped even further. Examining the recovery from the pandemic, we find a similar trend. While the rate of growth appears to have increased, data from the RBI for 2021-22 reveals a different story. Corporate sales surged by 41%, with profits rising by 20%, despite minimal overall economic growth. This suggests that the growth of the corporate sector comes at the expense of the non-corporate sector. Essentially, the corporate sector has exerted dominance over the non-corporate sector, leading to increased pricing power and monopolistic tendencies.
So, let’s examine the official growth rate and its apparent slowdown, which warrants our attention. Prior to the pandemic, the growth rate was already on a downward trajectory, reaching 3.1% in the quarter just before its onset. When we consider the various challenges, particularly stemming from inequality due to the decline in the unorganized sector, we find that the economy’s growth rate has not been the touted 6 or 7%, but rather more likely to 2 to 3%. In essence, the Indian economy isn’t the fastest-growing as officially claimed. This discrepancy largely stems from the lack of accurate data on the unorganized sector, which is often approximated by the organized sector, an incorrect methodology.
The economy’s behaviour indicated a decline even before the pandemic. Post-pandemic, there have been fluctuations, with periods of rise and fall in quarterly terms. However, the average rate of growth over the last decade or so is estimated to be around six and a half percent.
Evidence of the unorganized sector’s decline is apparent in various industries such as FMCG, trade, pressure cookers, luggage, and leather goods. Reports suggest a clear decline in the unorganized sector while the organized sector is on the rise. For instance, in the pressure cooker industry, the President of the Prestige Pressure Cooker industry notes a significant growth rate of 24% in the organized sector, while the unorganized sector is declining. Similar observations were made in the luggage and leather goods industries.
It’s Just 2% Growth
Considering different scenarios, if the unorganized sector’s growth rate is at 0%, the overall rate of growth would be around 3.72%. If the unorganized sector is declining at 5%, the rate would be around 2.17%. However, if the decline in the unorganized sector is as steep as 10%, then the rate of growth would plummet to around 2.62%. These calculations assume that the organized sector’s growth rate is accurately measured. If there are errors in measuring the organized sector’s growth, the situation could be even worse. Previous analyses suggest that the decline in the unorganized sector could be around 10%, resulting in a rate of growth closer to 1 to 2%, rather than the claimed 7 or 8%.
When considering the income and poverty situation in the unorganized sector, it’s notable that individuals in this sector are being registered on the e-SHRAM portal. According to the Prime Minister, around 30 crore people have registered, with 94% reporting earnings of less than 10,000 rupees per month. Comparing this to the World Bank’s poverty line of $2.15 per person per day, which translates to roughly 26,500 rupees per month for a family of five, it’s evident that most families fall below this threshold. Some argue that this data is in nominal dollars, and when converted to PPP terms, it amounts to around 9,500 rupees per month, which is still around the poverty line in the country. Thus, a significant portion of the population is either near or below the poverty line set by the World Bank. While individuals may surpass the Indian poverty line, globally, they remain close to the poverty line.
Three Inequalities
The hierarchy of inequality comprises consumption inequality, income inequality, and wealth inequality. Recent consumption data suggests a decline in consumption inequality. However, income inequality remains a significant issue, as the incomes of the affluent far exceed their consumption, resulting in higher savings. Rough estimates from the World Inequality Report indicate that the top 1% earns approximately 22%, while the bottom 50% earns only 13%. Notably, this data does not encompass black income generation, which, if included, would likely show even greater disparities, with the top 1% possibly earning around 40%, and the bottom 50% earning much less, around four or 5%.
Credit Suisse has provided some data on wealth, but it’s important to note that this data solely relies on estimates from the formal economy, excluding the black economy. Consequently, if we were to factor in black income generation, wealth inequality would likely be even more pronounced than what is indicated by the Credit Suisse data. Generally, wealth inequality surpasses income inequality, and income inequality surpasses consumption inequality. Therefore, it’s crucial to concentrate on income inequality, as it significantly impacts GDP and growth.
Muddling the Unemployment Problem
This inequality manifests across various dimensions, including the disparity between capital and labour and between the organized and unorganized sectors. Within the manufacturing sector, there exists differentiation between large enterprises and MSMEs (Micro, Small, and Medium Enterprises), further compounded by divisions into micro, small, and medium sectors. To illustrate, the large sector comprises 6,000 firms, whereas the small and medium sectors encompass six lakh firms, with the micro sector consisting of six crore firms. This vast contrast underscores the challenges faced, particularly by micro and small enterprises, which comprise 99% of units and 97.5% of employment. Unfortunately, these sectors have been severely impacted, contributing to the worsening unemployment situation in the country.
The micro and small sectors have indeed borne the brunt of economic challenges, worsening the unemployment crisis in the country. Additionally, there exist various other divides contributing to the complexity of inequality. These include the rural-urban divide, the caste and community divides, regional disparities between North and South, and gender disparities. Unfortunately, these multifaceted inequalities are not adequately reflected in GDP measurements.
The Monster: Black Economy
Over the years, the size of the black economy has grown significantly, reaching alarming proportions. For instance, estimates suggest that the black economy accounted for around 62% of the total economy in 2012-13. This means that a substantial portion of economic activity remains unaccounted for in official GDP figures. The presence of a large black economy hampers the economy’s true potential. It means that individuals are engaged in unproductive activities, effectively contributing nothing to overall output. This “activity without productivity” phenomenon leads to inefficiencies in resource allocation and investment, preventing the economy from realizing its full potential. Consequently, while GDP may capture the presence of multiple income streams, it fails to account for the lack of actual productive output associated with the black economy.
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Top of Form
I’ve written in a paper that due to the black economy, India has been experiencing a growth rate of around 5% since the mid-70s. Consequently, today, the Indian economy could have reached $24 trillion, rather than its current $3.5 trillion size. It would have been roughly equivalent to the US economy’s scale had the black economy not existed. In essence, the black economy amplifies all the issues we discussed on inequality and growth.
Additionally, it’s evident that we are unable to effectively address the black economy. This is reflected in the stagnant direct tax-GDP ratio, which has remained between 5.5% and 6.2% over the past 15 years. The lack of change in this ratio implies that the black economy still holds significant sway.
To conclude, GDP and poverty data provided are inaccurate. Therefore, our growth is inequitable and highly skewed. The rising inequality is causing significant losses for the unorganized sectors, amounting to about 10 to 12 lakh crores annually post-demonetization, while the relief provided to them is only three to four lakh crores. Unless we address these inequalities, our growth trajectory will remain stunted and fail to accurately reflect the state of the economy. Hence, the issue lies more on the demand side than the supply side.
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Dr Moumita Paul
Economist, Deloitte
I would like to take a different view on GDP. The topic poses is a rhetorical question. Why do I say that? GDP has been the measure since 1870 in India, and there has been no other measure which has taken its place. There is not one indicator which has come close to substituting GDP as the measure of economic growth, and all countries use it. The question we are trying to address is, how to make GDP growth more robust. Is it actually incorporating all that is happening in the economy?
Growth in Infrastructure
The physical, social, and digital infrastructure in the past 10 years have grown. It is a proxy of whether the country is improving or not. The government has been doing a lot of capital expenditure. It has been doing it quite heavily and front-loading it. In the last 10 years, look at the number of airports, the railroads, and national highways. They have all improved. This is a way to facilitate growth in the coming years.
In social expenditure, there are comments that we do not invest enough in education and health, and it will lower our capability to grow in the coming years, which is true. But we cannot go from zero to one directly. We have to go through the entire process. The government has been spending around 6.8% on social services, which includes education and health. From the indicators that come from the National Institute of Health and Family Welfare studies, the gender parity index in higher education has improved. The infant mortality rate, maternal mortality rate, labour force participation rate, and pucca housing have all gone up.
Push on Digitalisation
If you compare these numbers to those of a very developed country, they may not look very good, but for a developing country like us, this is improvement and development. The biggest change which we have seen in the last 10 years is the push on digitalization. Now, we are getting a lot of high-frequency data which we can incorporate to understand what is happening to the economy. There has been a massive growth in the Jan Dhan accounts. The rural and semi-urban beneficiaries are having a lot of Jan Dhan accounts.
Aadhaar has been one of the path-breaking digitalisations which we have gone through. Look at the statistics of UPI transactions by volume, CoWIN, and the Digilocker. The numbers show that UPI has saved the Indian economy approximately Rs 5.5 trillion between 2016 and June 2023. This is going to help us propel growth in the future. We have made breakthroughs in FasTag, BharatNet, ONDC, and the capital market through digitalization. The monetary benefits of technology are huge. By bringing down the settlement period to T+1 day, investors have saved Rs 35 billion annually. These are numbers taken from reports and are not our calculations.
India’s digital economy has grown almost 2.4 times and has generated 62.4 million jobs during this period. Employment has been an Achilles heel for us, but the digitalization of the economy is helping the ball roll. It has led to a lot of good macroeconomic numbers. Based on our current account balance in 2012-13, we were termed as the fragile five because our economic fundamentals were very weak. But now, the current account balance and our foreign exchange reserves have improved quite significantly.
High Value Basket
In the fiscal deficit, of course, we are facing a problem. The pandemic threw us off the curve, but we are in line to attain our fiscal consolidation in the near future. In the banking sector, there is high improvement in the NPS. FDI gross inflows into India have improved significantly in the past 10 years. This year has not been good for FDI inflows. But if you take a decadal comparison, the numbers have almost doubled because of something which we might be doing right; people come and invest in us. The trade basket is moving from the traditional basket to a high-value basket. It means for the same amount of effort, you get a higher value. That means the GDP is also increasing at a higher rate.
We have seen in the past that inflation in India would be around 10%, but that has come down to 4% and 5%. Rural inflation is still at 5%. There are only five states as of now which are a little bit higher than 6%. If rural inflation is low, then that helps the rural economy to save some money. They have got higher personal disposable income.
The Trickle-Down Effect
All these lead to a trickle-down effect. In 2021-22, people with income less than 1.25 lakhs were 38 million, which is just 12% of the population. In the year 30-31, it is projected that they are likely to go to 6% of the population. In the middle-income bracket, which is people earning around 1.25 to 5 lakhs, they were 50%. Now they will move to 38%. So basically, the number of poor is shrinking, and the number of rich and ultra-rich is increasing. People are investing in the EV (electric vehicle) segments, across the low, middle, and high-income groups. They are conscious of the climate and they think beyond their purchasing power, for the betterment of the economy.
The market size of preventive healthcare has gone up. People are moving from basic sustenance to one level up. There is a high correlation between GDP and HDI (Human Development Index). The top 10 countries ranked in HDI are mostly the Nordic countries and the European countries. We need to be rich to have a better HDI. Without being rich, we do not have a seat at the table. So I think it is important to get rich first, and that is driven by some. The entire population cannot become rich suddenly. It is the sum of some who become rich and then pull the others.
