MUMBAI: Once in every three months, the Central Statistics Office (CSO) releases data on national accounts charting the economy’s performance. Typically, GDP is arrived adding up every bit of paid activity among goods and services across states and is considered the go-to measure of the economy.
In ordinary circumstances it may not get much attention, but thanks to demonetisation the recent data has come under the scanner as it seems out of sync with ground reality. It also raises concerns if it is a less than perfect way of capturing the economy’s health.
During the fourth quarter of FY17, economy decelerated sharply, which was unexpected and the markets slipped in response. A quarter before that, factoring in demonetisation, everyone anticipated carnage on this celebrity statistic. Instead, the CSO figures turned in better-than-expected 7 per cent growth – only a few notches lower than the second quarter's 7.4 per cent.
At 7.1 per cent growth in FY17, India, and its over $2 trillion economy, is still the fastest growing, but if one were to consider the moving parts, GDP doesn’t seem a true reflection of what people are actually experiencing. Cash-dependent real estate and financial services are yet to play catch-up.
Construction activity slowed, automobile sales remain subdued, manufacturing held up well, but added few or no new jobs, private sector profitability is under pressure, while wage increases are struggling to match employee expectations. Importantly, a large part of India’s economy comprises informal sector, whose positive output nor struggles during demonetisation were captured to the full extent. This brings into context, Robert F Kennedy’s famous quip 40 years ago, that GDP 'measures everything, in short, except that which makes life worthwhile.’
The accounting metric was first invented in 1930’s to determine the impact of great depression. But Simon Kuznets, the man behind the invention, specifically cautioned against using it as a measure of welfare. In fact, at the last year’s World Economic Forum in Davos, IMF’s Christine Lagarde and separately economists including Nobel prize winners like Jospeh Stiglitz, Michael Spence and Amartya Sen noted that GDP was a poor way of assessing the nations’ health and there was an ‘urgent need to find a new measure’ and why?
When GDP was first introduced, countries were dependent heavily on farms, production lines and mass markets. Today, services dominate, with technology playing a predominant role. GDP doesn’t count work and production like unpaid labour or household work. As a concept, there are critical missing parts and and from time to time, dissatisfactions brought forth alternatives.
In 2009, a report commissioned by French President Nicolas Sarkozy and chaired by economist Stiglitz and Sen, called for an end to 'GDP fetishism.’ Other alternatives include China's Green GDP, which adjusts environmental factors. OECD’s alternative adjusting leisure, the Index of Sustainable Economic Welfare accounting for pollution costs and income distribution, and the Genuine Progress Indicator, which adjusts income distribution, value of household and volunteer work.
But none are perfect and they won't replace GDP anytime soon. Given its popularity, it is often cited in discussions with some governments like China even setting specific targets. But it’s critical to remember that it doesn’t reflect the 'quality of life.’ If one finds the figure unconvincing, it helps to remember that growth data, released every quarter, is not set in stone.