The GDP row is a fight of the fools – Here is why

By: | Published: September 21, 2018 12:37 AM

GDP growth cannot be solely attributed to any government, as the market economy involves many players.

The GDP row is a fight of the fools

Because politicians ultimately end up being policymakers, they should do better in appreciating the fact that GDP is not everything—it is not the sole indicator of economic progress; it has never been. To tell the obvious, GDP measures how much an economy produced over a period of time. Other occupation classes more or less know this in their everyday lives that what matters for wellbeing or development are jobs, prices and environment pollution. Unfortunately, unemployment, inflation and ecological degradation have never been a serious electoral issue for politicians. At a time when unemployment rates have risen and exchange rates are depreciating, not to mention the soaring pollution levels in many parts, politicians’ obsession with GDP and the resultant hullabaloo in capturing media space are surprising. The report of the Committee on Real Sector Statistics has been subject to much discussion as analyses reveal the UPA-era GDP growth rates outshine the current regime’s performance. It is pertinent to discern the fact that the economy has shown remarkable resilience to some historic macroeconomic decisions in the past.

Basic macroeconomics tells us that GDP data is not a perfect or satisfactory measure of economic wellbeing as it has a lot of limitations. For example, it does not take into account leisure, home-made food, costs of ecological degradation or pollution, and the underground or black economy. Moreover, in the Indian context, GDP is a rough estimate, with many assumptions and imputations and statistical proxies involved in the calculation. This, by any means, is not the only indicator available to understand an economy’s health. While it is impossible to pinpoint which government’s what policies helped GDP growth in which manner, very few talk about how to make such GDP growth equitable across regions and social groups, and how to make it sustainable. Almost no one talks about agrarian distress or de-industrialisation in parts of the country. Having said that, politicians and their followers are slugging it out on the GDP performance of Narendra Modi and Manmohan Singh governments. A base year change accompanied a change in the composition of goods and services in the representative baskets in calculation, and to put the new data at par with the old series, many back and forth assumptions and imputations have been used.

The fact is that GDP growth cannot be solely attributed to any incumbent or previous central government. As a statistical artefact, the central government’s contribution to GDP growth is not as much as the political class believes. It is minimal. We have a federal polity with three tiers of government. Many people tend to associate GDP growth with the Union government, while forgetting the importance of other governments and structures. Many growth-enabling policies are executed by laws and regulations that come under the constitutionally-earmarked State Subject. Construction, industrial manufacturing, electricity, etc, are influenced by laws and policies of state governments. Moreover, a cursory look at the components of GDP would clear up the narrative. Farmer-specific decisions and monsoon drive agricultural production, while the government supports through indirect means such as farm loans, procurement, minimum support prices, crop insurance, etc. Manufacturing is something that is directly determined by company-specific balance sheets. The government has no direct role here. The construction sector relies heavily on cement and steel—two sectors where the government is a fringe player. Transport, telecommunication and hospitality industries are again mostly in the private sector. Real estate and banking are also largely the domains of big corporates. The central government’s budgetary spending on public administration, defence and other non-development expenditure may be its real contribution to GDP growth. The idea is that GDP growth does not tell us the whole story.

The debate, therefore, should be about whether the policies of an incumbent government are growth-enabling in nature or not, and whether GDP growth is marked by distributive justice. For all the uneasiness when there is some uncomfortable happening, the central government must be lauded for the fact that some much-needed structural reforms have been put in place in recent years. While increased financial inclusion (PMJDY bank accounts) and a successful LPG cylinder distribution scheme (Ujjwala) are poverty-alleviation successes, long-term structural reforms such as GST, IBC and a regulatory authority for the real estate sector (RERA) are some growth-enabling policies that will bring positive effects after a time lag. The performance of the government on equal distribution of economic growth or environmental degradation to enable this growth should be debated and form part of politicians’ concerns. Sadly, they are not.

Not just GDP, Indian politicians and their followers naively tend to relate the rupee’s condition or food inflation with the central government’s competence. All those circulating internet memes that attribute the depreciation of the rupee-dollar exchange rate to Modi (or MMS) government’s inefficiency are fools. The strength of the rupee is a consequence of balance of payments and greatly affected by external factors. If anything, the central bank is responsible for managing or regulating the exchange rate. Most of the time, food inflation is a supply-side problem where the government’s scope of work is small.

In a market-driven economy, the central government surely plays a critical role as a growth enabler as it takes care of all the non-economic issues and leaves the private sector for production. Various policy initiatives of the central government make it conducive to invest and produce more and have higher GDP growth. It provides a level-playing field and tries to ensure fair play, but the results of growth are determined by various market players. Recession-time stimulus spending or taxation reforms have a lasting effect on GDP growth, but become fruitful only after a time lag. Associating the country’s GDP growth with the central government alone, or attributing the current growth that is much influenced by the previous government’s growth-enabling policies for that matter, is erroneous and should be discouraged. Therefore, the current unseemly GDP row to gain political brownie points is a fight of the fools.

By- Sitakanta Panda, Assistant Professor, Economics, IIM Amritsar. (Views are personal)

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