GDP decoded: What it tells you and what it doesn’t

GDP is a key economic statistic that indicates whether our standard of living will get better.

Published: 31st May 2016 07:11 PM  |   Last Updated: 31st May 2016 07:12 PM   |  A+A-

PTI5_31_2016_000146B.jpgCHENNAI: The Gross Domestic Product (GDP) isn't any fancy number. It is a key economic statistic that indicates whether our standard of living will get better, if there will be more jobs, if salaries will go north or south and if we need to tighten our purse strings. The central government has released the new GDP data for FY16. Here's a ready reckoner that will help you play the economist.

What is GDP?

It's a measure of the country's total production of goods and services, and tells us how sectors like manufacturing, agriculture, industry and services have performed at a certain point of time. The figure is arrived at by adding up all the output from these sectors. It indicates how rich (or poor) the country is and where it is heading. The government measures the GDP every quarter in line with international practice. If the GDP is up, the economy is growing. If it is down, it is contracting. Two or more consecutive quarters of contraction mean that the economy is officially in recession.

What does this number tell you?

India's GDP for the year ending March 2016 was pegged at Rs 136 lakh crore. Since it's a huge number, it is often shown as growth in percentage terms over the last quarter or the previous year. Currently, India is growing at a world-beating 7.6 per cent per annum (or 7.9 per cent for the last quarter), leaving behind even developed economies like the US and UK, which are growing at a piffling 1-2.5 per cent every quarter. Even the IMF and the World Bank have declared that India is indeed in a 'sweet-spot.'

So does this mean more jobs?

A high GDP growth rate implies better prospects, provided inflation is kept in check. Even when the GDP is growing, if inflation is sticky, it affects consumers’ and companies' spending power. Though broadly, inflation is within reasonable limits now, food inflation, particularly prices of pulses, vegetables and fruits are steep and have been a drag on overall growth. It is RBI's mandate to control inflation at less than 6 per cent. To do so, it uses a key policy tool, interest rates, to tame the price rise.

Why does GDP fluctuate?

When the economy is booming, inflation rises as labour and production capacity hit a peak. This compels the Reserve Bank of India to increase interest rates to cool an overheating economy. But when interest rates rise, companies and consumers cut spending, and demand falls. This forces companies to cut jobs. And as employment figures slide, consumer confidence  gets adversely affected. RBI steps in again to lower the interest rates to encourage companies to borrow more to add capacities and hire more people. These income earners reboot domestic demand by spending more, which stimulates the economy. This is a repeating cycle and that's how we see economies growing and contracting.

What doesn't GDP tell you?

It doesn't tell you about your happiness index or quality of life. It does measure the per capita income, which is nothing but the GDP number divided by the total population. For FY16, India’s annual per capita stands at Rs 93,231. But that does not mean that all of us are earning a similar sum. Per capita income therefore isn't an accurate measure as a population includes children, students, retired people who do not have an income.

Also, in some cases, GDP may be growing, but not fast enough to create jobs. For instance, India's GDP has been growing over 7 per cent for the past two-three years, but the manufacturing sector, which contributes to over 40 per cent of the country's total employment, witnessed negative growth of 4.2 per cent in FY15.


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