Value addition to the gross domestic product (GDP) is important when people move into newer areas of work rather than just a rise in the growth numbers, said Reserve Bank of India (RBI) governor Raghuram Rajan on Thursday while asserting the need to be careful in counting GDP numbers.
Rajan was speaking at a convocation ceremony at the Indira Gandhi Institute of Development Research in Mumbai.
The RBI governor gave an example of two neighbouring mothers who babysit each other’s children and get paid an equal salary. He said both the mothers getting paid a salary will be an addition to the GDP but may not be an exact reflection of an economic growth.
“If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off,” Rajan observed.
Rajan said it is important to look at the way the GDP is calculated as some times the rise in GDP may not be a case of any value addition.
It is noteworthy that industry experts in the past have expressed some bit of skepticism over the calculation of GDP numbers according to the new methodology.
“So, in that sense we have to be a little careful about how we count GDP because sometime we get growth because people moving into different areas. It is important that when they move into different areas they are actually doing something which is more value added,” he asserted.
Pranab Bardhan, a professor at the University of California, Berkeley, who was the guest of honour at the event, raised the point on the possibility of restructuring the current system of capital subsidies to wage subsidies through which the business sector could be actively involved in worker training programmes as well as identifying good workers.
Supporting the issue, Rajan stated there is a need for incentivizing employment rather than providing subsidies on capital. “Apart from direct tax benefits for investment, we also give subvention on loans in many situations which subsidies capital. We may not do similar things for labour. Clearly, trying to incentives the employment which will add skills to labour is extremely important,” Rajan added.