Last week, the Government released figures of Gross Domestic Product (GDP) growth and it led to a lot of general furor about the state of our economy. While economists, politicians and commentators like to go bananas over this one term, it is quite difficult for a mango person to understand what this is about. What does a 5% GDP growth rate in the last quarter mean exactly?
And no, the answer is not, “It was 8.1% in 2018 quarter one, so the current gormint sucks!”
Funnily enough, Quarter 1 of 2018 was when the BJP twitter handle stopped talking about GDP, for obvious reasons.
Since Aug 2018, BJP has not shared an infographic on quarterly GDP growth rate. Because it looks like this. ? pic.twitter.com/BoIyD1Igf4
— SamSays (@samjawed65) August 31, 2019
In our heads, it’s usually like this: “GDP is higher than such and such country! That’s awesome.” or “GDP is lower than such and such country! That’s terrible.” It’s more or less a competitive game where countries seem to be trying to prove how they are doing better than the rest of the world. But does GDP growth actually affect the man on the street, economically? That is a question that needs some answers.
First, let’s figure out what GDP is.
The usual definition of Gross Domestic Product is, “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.” The words in bold is where the tricks of the trade lie.
Think of our economy as a giant mall. You pick up stuff, go to the cash counter, it goes beep, you pay for it and done. The ‘beep’ is where the monetary value of what you bought is being recorded. That is, in crude terms, the GDP of the mall being counted. If you are buying baingan for making bharta, the cost of the baingan will become a part of the GDP. But, if you’re a restaurant owner who is making bharta and selling it, the value of the bharta, the finished product, will be measured.
This part is important because the labour and value being added into converting a baingan into a bharta will only be counted if someone pays for it. If you’re consuming it at home, your own labour is… not worth anything, because it has zero monetary value. So what is the best way to increase GDP, you ask? Well, just encourage bharta dishes with more value.
A 5 star restaurant, selling 5 star bharta under the name “Roasted Mashed Aubergine Masala”, with a garnishing of cherry tomatoes on top, will have way more value than a dhaba selling the same bharta. Since it’s monetary value is what matters, a Government will always like Aubergine Masalas to be made as opposed to dhaba bharta. They would give even lesser importance to your homemade bharta.
Another thing here is the labor that is not getting counted, mainly, domestic labor. More specifically, the women and men toiling in their homes to make sure that the family is productive simply doesn’t count. If these homemakers buy finished products, only then they contribute to the GDP. Add to this the fact that India has a giant unorganized sector, where the goods and services being produced are just estimates. They might or might not be correct but they’re also included in the GDP figures anyway.
Going a little further, this whole calculation becomes a wee bit more complicated when you add the ‘value of money’ factor to it.
Let’s go back to our shopping mall example. An Aubergine Masala which is priced at Rs 500 today might have cost Rs 250 five years ago. So if you measure GDP over 5 years, based on this single item, it’ll show that growth doubled during that period. This is problematic. When you don’t consider inflation, meaning the purchasing power of money, GDP growth becomes quite… extreme, on paper.
So what we need to look at is Real GDP. This would be the price of goods keeping the value of money constant on a decided year. The Modi Government, in 2015, changed the base year for GDP measurement to 2011-12 from the earlier 2004-05. This exercise is actually required to be done periodically, to keep the real GDP measurements accurate. But what the government also did was change the database. In the earlier method, actual output of the manufacturing sector, crop production, and employment of the services sector was being measured. In the new method, new estimates have been added such as consumption, employment, and the performance of enterprises. Critics have raised their eyebrows about this, but we’ll not get into that too much. Let’s leave it for the critics to argue over.
Now for the final question that actually matters: Does the GDP really show how the common man is faring, economically? Does growth in GDP mean everyone in the country is better off?
Simple answer:
Back to the mall! Just think about our bhartas again. There would be only a certain category of ultra-rich foodies who would be able to afford our Aubergine Masala. One plate is worth adding Rs 500 to the GDP which would be equal to ten plates of dhaba bharta. Now that, ladies and gents, is how wealth inequality comes into the picture. Even if the top 10% of the population keep spending and buying more high value items, the GDP will keep growing and the country will keep shining. Again, on paper. The contribution of the low income groups will barely count because they’re either having dhaba bharta or just cooking at home.
If you divide up the GDP with the population, which is per capita GDP, it might show we’re higher than other countries, but it is not representative of how much a large amount of population is earning. The GDP figure, by its very nature, kinda assumes that the wealth in society is equally distributed when the truth is far from it.
But, all said and done, GDP has proven to be a good indicator when an economy goes into a recession. The side effect of that is also the fact that business owners bandy the term ‘recession’ around as an excuse to do layoffs, which in turn affect the common man.
Is there a better indicator which shows the actual economic condition of the population? Sure, there are things like Human Development Index — which includes life expectancy and education levels along with per capita income — and even things like Gross Domestic Happiness — which includes factors like socio-economic development, environmental conservation, protection of culture and good governance. But these are not widely used because decision-makers around the world just want to stick to thinking in terms of: “How productive are our citizens?”
Maybe, perhaps, probably, now is a good time to ask another question instead: “How happy are our citizens?”
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