Mysteries of the GDP growth rate

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Mysteries of the GDP growth rate

Monday, 30 November 2015 | Atul Chatterjee

GDP figures and trends often don’t reflect the sectoral nuances. Instead, they obscure the picture of reality, which is usually an aggregate of disparate factors

Quality of growth is not known, it rises like a hazy smoke; rich are those who receive it, doubly rich those who speak on it.  Assurances or scares about prospective growth rates are issued, but seldom are these forecasts systematically verified for consistency with actuals. The gross domestic product growth rate obscures a detailed picture of reality as it aggregates disparate sectors.

Also, we often fail to change what we have been seeing for a long time. Take, for example, the road construction sector. large sections of roads are repaired after the rains and then builders construct roads possibly designed to self destruct. Civic authorities, across the country, probably spend more money in total on road repairs than the highway building authorities, but the former being an ad hoc recurring expenditure, disaggregated and with disparate ownership of data, we have patchy statistics. Money to repair roads, flyovers and bridges boosts the GDP growth rate. Government projects are characterised by deliberate inefficiencies, inadvertent inefficiencies and transaction costs (kickbacks). Malpractices occur in advanced countries but to a lesser extent and scale. However, overspending and inflated costs result in higher growth rates!

A shadow rate of growth could be attempted for some activities. For example, when expenditures on repairs, incurred after completion of road projects in municipalities, cross a certain threshold, deduct the cost from the contribution to the GDP. Depreciation is applied in such projects but it is small compared to actual repairs. One reason why we do not have such accounting measures is that it is not a pressing problem in the West and academics in India wait for theoretical research ideas that come from overseas. 

Another well-studied problem is that some goods are actually ‘bads', for example tobacco and alcohol. During traffic jams, vehicle engines keep running. Now, with remote sensing and other methods, it is possible to dynamically estimate atmospheric  pollutants. Ideally, a dynamic ‘pollution deflator' should put a brake on GDP even as fuel sales inflate GDP. In the US, according to the World Bank, the average health spend by individuals is at least 50 per cent higher than in Holland. However, parameters of longevity, health spend in the last 10 years of life, activity levels of the aged, and other indicators of health, strongly suggest that the Dutch are healthier than Americans. High growth rate of healthcare spends is good provided it results in improved overall health and not only cures. How much of the health spend is on preventive careIJ Rates of growth in diabetes, heart ailments and others are ‘bad' goods as also a large fraction of the concomitant spend.

‘Good' goods, for example, gymnasiums, have shown substantial growth in the past decade in India. Running events and workout groups are now popular in many cities. So these value additions need a ‘positive inflator' beyond their money value, as their effects are long term.

A basic way of examining the quality of growth is to look directly at beneficiaries. Since 2000 or so, agriculture in Gujarat has shown an average growth rate, depending on the political lens used, between 4.8 per cent and 11 per cent, and is accepted as more than the three per cent national rate. Examination of the switch to cash crops, the stability of conventional output and the higher total milk output will provide estimates of population segments which gained. In Gujarat's Saurashtra, a drought-ridden region, small farmers migrated seasonally for employment and to reduce the resource stretch in their villages. It has been observed that reduced seasonal migration reflects a benefit of growth rate across the hinterland and can be used as an alternate measure. Similarly, for the urban poor, their travel patterns, remittance patterns, gains in body weight on migration can substantiate the growth story. 

A basic drawback in Government statistics is that they are conventional due to legacy mandates, with the National Council for Applied Economic Research doing different work as it accepts private projects. Some Government sources of economic data broadcast have shown signs of  inconsistency, so other sources are needed for verification.

 

Similarly, an observed characteristic of expert broadcasters is that when the economy is upbeat, growth forecasts fly out fast and thick. When the economy dips, the experts quieten down.

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