Consider two snapshots. Lakhs of young people protesting at Delhi’s Jantar Mantar, hopeless and anxious about their future. India announcing it’s the fastest-growing economy in the world, with record double-digit nominal GDP growth. These events are not decades or years apart, as they may seem—they are separated by just four weeks.
How can lakhs of Gen Z youth be out on the streets in protest against the government when the nation is supposedly experiencing its best economic conditions in recent history? This, in essence, sums up the brouhaha over the GDP figures for the latest quarter released a few days ago.
First off, there is a lot that is wrong with India’s economy and its GDP measurement. But the sheer math behind the 7.8 percent real GDP growth is not one of them, contrary to what a former government bureaucrat has claimed.
The economy is perhaps the only thing reduced to a statistic that every individual—rich or poor, Hindu or Muslim, rural or urban—experiences every single day. Then, how can millions of Indians be so disenchanted with the economy when the measure says it is robust?
If the math behind the measure is not the problem, then it follows that either what we measure as GDP is wrong, or there is a disconnect between GDP and living conditions for the average Indian, or both.
Former Chief Economic Advisor Arvind Subramanian argues that it is the former. He has demonstrated with reasonable evidence that ever since the GDP estimation methodology was changed in 2015, the correlation between economic indicators such as electricity consumption, taxes collected, exports, bank credit and the GDP measure has broken down. Put simply, accompanying indicators of a strong or weak economy do not match up to the GDP estimate as they did earlier.
Measuring GDP ain’t enough
While this may be true, what is more worrying is that GDP, even if measured accurately, is no longer sacrosanct as an indicator of a society’s wellbeing. Incomes and the prices of goods and services are how people experience the economy every day. Incomes are generated through jobs, and prices are determined by demand-supply forces.
India’s economic structure is largely driven by private enterprise, unlike China’s State-controlled economy. So, only the private sector can generate jobs at scale for India’s huge labour force. Then, the surest measure of job creation in the economy is private corporate investment. In the maze of economic measures and statistics, this is the single most important indicator of a sustainable and robust Indian economy.
Only when the private sector invests does it create jobs, which then translate into incomes for the vast majority of people in the labour force. Private sector investment has languished at about 10-12 percent of GDP over a decade, down from 14 percent in the decade before. Had India’s corporates invested with the same enthusiasm as in the previous decade, they would have put in a whopping $700 billion more than they actually did.
When corporates are reluctant to invest, the government can step in to do the heavy lifting for a year or two but not for long, since government finances are already stretched. But the private sector has stubbornly refused to invest and expand for a decade now.
This is despite the Modi government’s misguided attempts to woo the private sector to invest by giving it huge tax cuts. In September 2019, even before Covid struck, the government slashed corporate tax rates ostensibly to boost private sector investment. Corporate taxes collected fell from 3.7 percent of GDP before the cuts to 2.9 percent in the five years after.
The government lost roughly $100 billion in revenues over five years due to the corporate tax cuts. Put in other words, the $100 billion was an ‘unconditional cash transfer scheme’ to the private sector.
The corporates simply pocketed this money without investing much back in the economy. Corporate savings (retained profits) rose from 10.5 percent of GDP before the tax cuts to 11.2 percent, while the investment rate stayed flat. The Union finance minister was livid—three years after the tax cuts, she lambasted the corporate sector as unpatriotic and ‘Hanuman-like’ for not investing enough despite the tax bonanza.
But the corporate sector remained nonchalant with their money even as they were lavish with their praise for the Prime Minister on social media.
So, here we are, seven years after the corporate tax cuts, the government has lost $100 billion in revenues with no increase in private sector investment and, consequently, not enough jobs for our bulging labour force.
Economists and retired bureaucrats can keep quibbling and squabbling over GDP methodology till the cows come home, but it means nothing to the crores of young people who are yearning for jobs and incomes.
It is in this context that a chest-thumping 7.8 percent headline GDP growth, badged as the fastest in the world, raises eyebrows. It is nowhere close to what people are experiencing in their daily lives, but that does not automatically mean that the number itself is suspect. Headline GDP growth is now a mere statistical performance that hides more than it reveals.
Rather than obsess over improving GDP methodology or the underlying data series, it is time to search for a more accurate and holistic measure. Private sector investment, jobs and wages are the most fundamental indicators to track on a regular basis rather than this meaningless quarterly GDP show. Even Simon Kuznets, the inventor of the GDP, did not intend it to be this all-pervasive indicator of human flourishing that it has come to be.
What we need instead is a PYJAMA act—or Prevention of Youth at Jantar Mantar! Only when an economy delivers good-quality jobs, sustainable incomes and rising living standards will our youth stop fearing for their future—and stop having to say so at Jantar Mantar. Clearly, high headline GDP growth is not a PYJAMA solution; perhaps private investment and jobs are the metrics to obsess over instead.
Praveen Chakravarty | Member of Parliament & Chairman, Data Analytics department of the Congress party
(Views are personal)