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Is GDP growth a reliable method of measuring state of the economy?
Mythili Bhushnurmath, Consulting Editor ET Now, in her article "Economists in Wonderland: GDP Growth, like beauty, may lie in the eye of the beholder" in TOI Jan 10, 2019 says that growth projections are estimates made by the Central Statistical Organisation, a Government agency.

They can go horribly wrong with events like "demonetisation", global economic meltdown and war. It is heartening to see that my view that GDP, per capita or rate of growth, are imperfect methods to measure the state of economy has some support amongst learned professional economists.

Fallacy of statistics

Statistics is bewildering. If a Rs 100 share's market value rises to 200, the increase is 100%. If the value of the share falls back to Rs 100, the fall is 50 per cent. In both cases the change is Rs 100 but the per cent change is very different.

Let us take another example. Rishab Pant has scored 500 runs in 10 innings. His average is 50. He scores a 100 in his eleventh innings. His average becomes 600/11=54.94. Kohli has score 5000 runs in 100 innings. His average is 50. He scores a 100 in his 101th innings. His average becomes 5100/101= 50.49. Both scored centuries but the effect on their averages is different.

China's GDP is say growing at 6.5% and India's is growing at 7.5%. Which economy is growing faster in real terms? Say China's per capita GDP is $ 16500. So the real increase is 165x6.5= 1072.5. Say India's per capita GDP is $ 7000 PPPP. So the real increase is 70x7.5=525 or about half of China.

The fact is that statistics is used more often to fool people or to confuse them than to serve any useful purpose.

What is the relevance of GDP?

GDP is widely used or perhaps misused by governments and economists to measure of the prosperity of countries and to formulate the economic policies that benefit private investors and not the interest of masses or a country. The Indian Government keeps trumpeting the GDP growth rate to convince hapless Indians that they are doing a great job of managing the Indian economy. It is therefore necessary that we understand the paradoxes of GDP.

GDP does not take into account usefulness of product

In terms of GDP, producing 35 litre of milk at Rs 40 per litre (Rs 1400) is almost equal to producing 1 litre of Scotch Whiskey Rs 1500. It is much easier to produce liquor once the plant is set up. A cow can give not more than 20 litres per day. A brewery may produce 1000 litres per day. So should we produce less milk and produce more liquor to increase GDP. 35 litres of milk may be enough to give one glass of milk to 100 children. 1 litre of whiskey may be enough to get two people drunk. Milk production generates much more income and employment for ordinary farmers. Milk does not produce problems of crime and addiction as liquor does.

Higher GDP is not always beneficial to the people

Rice (MSP) is Rs 1700/quintal. Max yield is 8 quintal per acre. So the GDP from 1 acre is Rs 13,600. Cotton is also a crop produced in Rajasthan during the rainy season. It requires good rains or irrigation. Its current MSP is Rs 5150/quintal. Max yield is about 4 quintals/acre. So the GDP would be Rs 20600 from one acre. Many farmers are switching from maize to cotton and maize is a crop produced in Rajasthan during the rainy season. It is a coarse grain and requires minimal irrigation. Minimum support p GDP is increasing. Maize is eaten by humans and used as animal and poultry feed. Its dried stalks are chopped and used as animal fodder. Maize also acts as a raw material for a variety of products like corn flakes, pop corn etc. Cotton stalks are not eaten by animals. They are burnt and add to carbon emission and global warming. Maize requires small investment hence small loans if any. These farmers never commit suicide. Cotton cultivation requires heavy investment when hybrids are cultivated hence large loans. Many cotton farmers commit suicide when prices drop or crops fail due to drought and they are unable to pay back loans. If all maize farmers were to switch to producing cotton in search of higher earnings and GDP, India would be importing corn and fodder for its cattle and poultry and use up hard to come by foreign exchange.

GDP growth may not produce jobs

Foreign or domestic investment in takeover of existing companies may increase GDP but may not create jobs. Thus, foreign takeover of Flipkart or Fortis added very few jobs. They may have led to job losses. As per a cartoon by Sandeep Adhwaryu in Times of India 17 January, Chennai Edition, Centre for Monitoring Indian Economy reported that India lost 11 million jobs in 2018. That when the economy is supposed to be growing at 7.4%. Where are we headed?

Trying to achieve high GDP growth can result in wrong priorities

Construction of mega highways is costly, over Rs 10 crore per km. With modern technology, it is possible to construct one km or more per day. So government gives priority to construction of mega highways over rural water supply. Cost of a tube-well dug to about 200m is about Rs 10 lakhs. Hundred such tube-wells can be constructed for Rs 10 crore. But it will take at least a week to complete one.  So to achieve high growth rate our government goes for mega highways. What do our brothers in rural India need more urgently; mega highways or drinking water?

GDP growth may not benefit ordinary people

Japanese investment in the Mumbai-Ahmedabad bullet train project may have added to the GDP but has no benefit for the ordinary people who cannot afford to ride it. It has led to many farmers losing their land and livelihood. Repaying loan for the economically unviable project will be a problem.

GDP growth may not benefit less developed regions of the country

Most investment, foreign and domestic, takes place in the more developed states like Gujarat, Maharashtra, Tamil Nadu or Karnataka. Very little investment flows to the backward states of UP, Bihar, MP, Assam and the North East. This creates income disparities and economic migrants which in turn create social problems.

So we see that aiming for higher GDP is not beneficial to all States and sections of society. It can pervert planning and keep making the rich individuals and states richer.   

A glance at some economic indicators of India

Item 

2013 

2014 

2015 

2016 

2017 

Source 

 GDP US$ bn 

 1856 

 2039 

 2102 

 2274 

 2600 

 IA Fact Book

 What Produ Million MT 

 93 

 95

 86.5

 87

 98

 US Dep of Agri

 Oil Produ Million tons

 37.86 

 37.78 

 37.46 

 36.94 

 36

 Wikipedia

 Exports

 313

 318

 310

 262

 275

 Wikipedia

 Remittance Billion US$

 67.6

 70.39 

 66.3

 62.7

 65.3

 Wikipedia

 Volue of RS   against US$ 

 60.72 

 63.19

 66.20

 67.90

 63.65

 Curently 71

 Forex Reserves billions $

 292

 304

 341

 360

 

 Coportecases

It will be seen that though the GDP growth is over 7% per year, wheat production increase is about 5% in 5 years. Crude oil production, exports, value of Rupee and remittance are all in decline. Foreign Exchange reserves have been rising possibly due to FDI which also explains reason for GDP growth.

Comparison with others

Item 

 India  

 US  

 China  

Bangladesh  

 Sri Lanka 

 Source 

 GDP PPP 2017 tn $ 

 9.459 

 19.390 

 23.159 

 0.751

 0.278

 Wikipedia

 GDP per cap 2017 $ 

 7174

 59495

 16624

 4561

 13001

 Wikipedia

 GDP Growth %

 7.3

 2.2

 6.7

 7.1

 4.7

 Wikipedia

 Un-Employement % 

 6.9

 3.9

 3.9

 40

 4.0 

 Wikipedia

 Expenditure health per capital PPP $ 2015 

 63

 9536

 426

 32

 118

 Wikipedia

 Currently value to US $

 71

  -

 6.76

 83.91

 182

 Google

Comparisons can be odious. But those who see India Shining may like to note that India is behind Sri Lanka in per capita GDP, employment and per capita expenditure on healthcare.

Conclusion

The reality of the Indian economy is that 25 million young Indians have applied for 90,000 blue collar jobs in Indian Railways. A milkman said to a BJP leader at an election rally, "Sir, petrol has become so costly that people are buying less milk." A student said, "Sir, there is no money in the ATMs. I have to pay fees." The the BJP leader said, "You idiots, don't you know that our GDP is growing at 7.5% and soon we will be the third largest economy in the world. World Bank and IMF are praising Modiji and our economic policies. Keep BJP in power till 2029 and you will be bathing in milk and honey."

As intelligent and informed citizens of a democratic country we must be aware of the ground realities before judging and praising our government and its policies. One must examine GDP and related numbers by keeping other statistics like unemployment rate, public spend on education and healthcare, population below poverty line (BPL), power consumption, cement consumption, need to develop the backward states, rural India etc. in mind. These numbers and the realities they represent don't change overnight with the change in GDP calculation methods or data manipulation.

How is our economy doing? Your assessment is as good as mine.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of merinews.com. In case you have a opposing view, please click here to share the same in the comments section.
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