The GDP game: Achieving high growth rate enough? What about factors like inflation and wage growth

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Updated: December 10, 2018 4:43:24 AM

There is a wonderful naïveté about the desire to register not just a high growth rate but one higher than the one the previous government achieved

The details of changing base years and changing methodology have been discussed by many others and need not be repeated.

The spectacle of two quick revisions in the GDP growth numbers by the CSO has not just brought that venerable institution in disrepute but should shame economists who have become accessory to this circus. The details of changing base years and changing methodology have been discussed by many others and need not be repeated. We have three sets of GDP growth numbers: Before the first revision, after the first revision and now the second revision. Revision of estimates is not unwelcome. Indeed, no GDP growth number is acceptable unless it has been through several revisions.

Real income numbers are very fragile and malleable. During the UK Coalition government of 2010-2015, there was a constant criticism of the fiscal policy of austerity. It was frequently alleged that UK was about to go through a double dip recession—two consecutive instances of negative growth in two pairs of two quarters. The debate raged. Two years later, the revised figures came out and showed there were no quarters with negative growth. It was just that preliminary data needed revision. The political damage was done by the preliminary data. The economic message was in the revised data two or more years after the event.

The Indian example is curious because the numbers have become a weapon in electoral battles. The party in power is not satisfied with the fact that the growth rate has been high during its tenure. It wants to demonstrate that its is higher than that of the previous government. There is a wonderful naïveté about the desire to register not just a high growth rate but one higher than the one the previous government achieved. This implies that the basic idea is that the GDP growth rate is the best if not the sole measure of a government’s economic effectiveness. No other indicators—inflation, unemployment, wage growth, bankruptcies, or even the Human Development Index achieved are relevant. It is a monistic philosophy.

But then the frequent revisions raise a fundamental question. How do we know what happened to the economy in 2017 if the GDP growth rate recorded is likely to go through drastic revisions in subsequent calculations? Did the UPA II achieve a double digit growth rate in one single year of its ten year tenure or did it not? What difference did it make to the economy? Did no one realise that the economy could not have possibly been growing at 10% plus but was growing only at some lower number? Did people feel cheated at the time a higher growth rate was announced which had not reached them or will they now feel cheated in retrospect because they were falsely happy?

The truth of all economic estimates is that point estimates are useless unless we know the bounds of standard errors around them. It is not worth quarrelling about basis points differences. A growth rate of 7.5% can be anywhere between 6.5% and 8.5%. No economic numbers should be published without including standard errors. The Bank of England began publishing its forecasts with standard errors in a ‘fan’ diagram to instruct people about the fragility of numbers. Indian economists and statisticians should adopt the same practice.

We should also initiate a debate about what does GDP measure in terms of human betterment. It is an age old debate but one that has not settled yet. Some years ago, Robert Summers and Alan Heston, both of the University of Pennsylvania, argued that certain items of public expenditure, such as defence, should be excluded from GDP when you wanted to measure its welfare generating properties. William Nordhaus, who won the Nobel Economics Prize has measured the environmental damages done during economic activity and published ‘green GDP’ estimates. ( No one living in Delhi could dispute the negative effects of air pollution). Similarly, the Human Development Index shows a pathetic performance on the part of India despite its shining growth rate during this century under both sets of coalitions since 1998.

More specifically, given the politics of reservation, why not have measures of household incomes of different social groups? Are the Marathas more deprived than other communities in Maharashtra? Has that always been so or is it a recent development? Let us have personal or household incomes, rather than just the GDP, since they relate closely to standards of living. There is no reason why there should not be a standing committee on household incomes which could periodically report the relative positions of different groups. That will tell us more about economic performance than GDP growth rates.

-The writer is a Prominent economist and labour peer

 

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