GDP

The Mother Economy

Mother_India_poster

Gross domestic product or GDP, is one of the most used or perhaps abused terms in economics. The trouble is that too many people use it without realising that it is ultimately a theoretical construct and not a real number.

In the simplest terms GDP is defined as the value of goods and services produced in a country during the course of a year. The trouble is in defining what has a value and what doesn’t. As the old GDP joke goes, when a man or a woman marries his or her housekeeper, the GDP of the country goes down. This happens simply because the housekeeper was paid for doing the house work. The spouse clearly won’t be.

On a serious note, this joke shows a big loophole in the way the GDP is calculated. The calculation takes only paid work into account. The trouble is that unpaid work forms a very important as well as large part of the economy, though this is something that most people do not realise.

As Kate Raworth writes in Doughnut Economics—Seven Ways to Think Like a 21st-Century Economist: “If you have never really thought of it before, then it’s time you met your inner housewife (because we all have one). She lives in the daily dealings of making breakfast, washing the dishes, tidying the house, shopping for groceries, teaching the children to walk and to share, washing clothes, caring for elderly parents, emptying the rubbish bins, collecting kids from school, helping the neighbours, making the dinner, sweeping the floor, and lending an ear.”

Most of us do these things and don’t get paid for it. Nevertheless, they are a very important part of the lives that we live.

Raworth is British and hence, invocates the term inner housewife. In India, there are real housewives (not that they are not there in Britain) who just take care of the home. As per the National Sample Survey (NSS), for women in the age of 25-54, the labour force participation rate varies between 26 to 28 per cent in urban areas and 44 per cent in rural areas. Hence, most Indian women don’t work, in the conventional sense of the term. But they run their homes. Even young girls who are not married are expected to contribute towards house work.

All this never gets counted towards the GDP. As Raworth writes: “In sub-Saharan Africa and South Asia… when the state fails to deliver, and the market is out of reach, householders have to make provisions for many more of their needs directly. Millions of women and girls spend hours walking miles each day, carrying their body weight in water, food or firewood on their heads, often with a baby strapped to their back – and all for no pay.” And given that there is no pay, the work does not reflect in the GDP.

In fact, economists have even put numbers to this unpaid work. “A 2014 survey of 15,000 mothers in the USA calculated that, if women were paid the going hourly rate for each of their roles – switching between housekeeper and daycare teacher to van driver and cleaner – then stay-at-home mums would earn around $120,000 each year. Even mothers who do head out to work each day would earn an extra $70,000 on top of their actual wages.”

This unpaid work which is a very important part of a running a household smoothly as well as bringing up a child, is not reflected in the GDP. And that is a real problem. This patriarchal attitude of economics as it is practiced, needs to be corrected in the years to come.

The column originally appeared in the Bangalore Mirror on June 9, 2017.

The Undependable GDP

On February 28, 2017, the ministry of statistics and programme implementation published the Gross Domestic Product(GDP) growth figure for the three-month period between October and December 2016.

During the period the Indian economy grew by 7 per cent. This took most economists by surprise because they were expecting demonetisation to pull down economic growth. On November 8, 2016, the Prime Minister Narendra Modi had announced that come midnight the notes of Rs 500 and Rs 1,000 denomination, would no longer be money. Hence, the GDP growth for the period October to December 2016 was expected to be lower.

In one go 86.4 per cent of the currency in circulation was rendered useless. As Alain de Botton writes in The News—A User’s Manual: “Like blood to a human, money is to the state the constantly circulating, life-giving medium.”

When money is taken out of an economy, it stops functioning given that economic transactions come to a standstill. In the Indian case, cash/currency is the major form of money given that a bulk of transactions happen in cash. As per a PwC report 98 per cent of consumer payments by volume happens in cash. The Economic Survey of 2016-2017 points out: “The Watal Committee has recently estimated that cash accounts for about 78 percent of all consumer payments.”

In this scenario where bulk of consumer transactions happen in cash, the Indian economy for the period October to December 2016, should have come to a standstill. But the government data suggests that it grew by 7 per cent.

This seems unbelievable. The private consumption expenditure has grown by 10.1 per cent, the second fastest since June 2011. This when the retail loan growth of banks during October to December 2016, grew by just 0.5 per cent. The manufacturing sector grew by 8.3 per cent when bank credit to industry contracted by 2.8 per cent. Hence, there is something that is clearly not right about India’s GDP data.

Some analysts and experts have suggested that data is being fudged to show the government in good light. I really don’t buy that given that there is no evidence of the same. Having said that, one reason why the impact of demonetisation hasn’t been seen in the GDP growth figure is because the GDP calculations do not capture the informal sector well enough.

This is primarily because small manufacturers and those in the retail trade do not maintain accounts. Hence, estimates of the informal sector need to be made using the formal sector indicators. As the Economic Survey points out: “It is clear that recorded GDP growth in the second half of financial year 2017 will understate the overall impact because the most affected parts of the economy—informal and cash based—are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators.”

In simple English, this basically means that the size of the informal sector while calculating the GDP is assumed to be a certain size of the formal sector. The formal sector has not been affected much due demonetisation. Hence, to that extent the size of the informal sector has been overstated in the GDP. It is expected that more information coming in by next year will set this right. This basically means that the GDP growth is likely to be revised downwards as more data comes in.

But this lack of dependable GDP data and other economic data creates its own set of problems for policymakers in particular.

This is a point that former RBI governor D Subbarao makes in his book Who Moved my Interest Rate?. As he writes: “Our data on employment and wages, crucial to judging the health and dynamism of the economy, do not inspire confidence. Data on the index of industrial production(IIP) which gives an indication of the momentum of the industrial sector, are so volatile that no meaningful or reliable inference can be drawn. Data on the services sector activity, which has a share as high as 60 per cent in the GDP, are scanty.”

Further, this poor quality of data is frequently and significantly revised, making things even more difficult for policymakers. And this possibly led YV Reddy, Subbarao’s predecessor at the RBI, to quip: “Everywhere around the world, the future is uncertain; in India, even the past is uncertain.”

Long story short—sometime around this time next year, the GDP for October to December 2016, is likely to see a significant revision.

The column originally appeared in Daily News and Analysis (DNA) on March 9, 2017

The Undependable GDP

On February 28, 2017, the ministry of statistics and programme implementation published the Gross Domestic Product(GDP) growth figure for the three-month period between October and December 2016.

During the period the Indian economy grew by 7 per cent. This took most economists by surprise because they were expecting demonetisation to pull down economic growth. On November 8, 2016, the Prime Minister Narendra Modi had announced that come midnight the notes of Rs 500 and Rs 1,000 denomination, would no longer be money. Hence, the GDP growth for the period October to December 2016 was expected to be lower.

In one go 86.4 per cent of the currency in circulation was rendered useless. As Alain de Botton writes in The News—A User’s Manual: “Like blood to a human, money is to the state the constantly circulating, life-giving medium.”

When money is taken out of an economy, it stops functioning given that economic transactions come to a standstill. In the Indian case, cash/currency is the major form of money given that a bulk of transactions happen in cash. As per a PwC report 98 per cent of consumer payments by volume happens in cash. The Economic Survey of 2016-2017 points out: “The Watal Committee has recently estimated that cash accounts for about 78 percent of all consumer payments.”

In this scenario where bulk of consumer transactions happen in cash, the Indian economy for the period October to December 2016, should have come to a standstill. But the government data suggests that it grew by 7 per cent.

This seems unbelievable. The private consumption expenditure has grown by 10.1 per cent, the second fastest since June 2011. This when the retail loan growth of banks during October to December 2016, grew by just 0.5 per cent. The manufacturing sector grew by 8.3 per cent when bank credit to industry contracted by 2.8 per cent. Hence, there is something that is clearly not right about India’s GDP data.

Some analysts and experts have suggested that data is being fudged to show the government in good light. I really don’t buy that given that there is no evidence of the same. Having said that, one reason why the impact of demonetisation hasn’t been seen in the GDP growth figure is because the GDP calculations do not capture the informal sector well enough.

This is primarily because small manufacturers and those in the retail trade do not maintain accounts. Hence, estimates of the informal sector need to be made using the formal sector indicators. As the Economic Survey points out: “It is clear that recorded GDP growth in the second half of financial year 2017 will understate the overall impact because the most affected parts of the economy—informal and cash based—are either not captured in the national income accounts or to the extent they are, their measurement is based on formal sector indicators.”

In simple English, this basically means that the size of the informal sector while calculating the GDP is assumed to be a certain size of the formal sector. The formal sector has not been affected much due demonetisation. Hence, to that extent the size of the informal sector has been overstated in the GDP. It is expected that more information coming in by next year will set this right. This basically means that the GDP growth is likely to be revised downwards as more data comes in.

But this lack of dependable GDP data and other economic data creates its own set of problems for policymakers in particular.

This is a point that former RBI governor D Subbarao makes in his book Who Moved my Interest Rate?. As he writes: “Our data on employment and wages, crucial to judging the health and dynamism of the economy, do not inspire confidence. Data on the index of industrial production(IIP) which gives an indication of the momentum of the industrial sector, are so volatile that no meaningful or reliable inference can be drawn. Data on the services sector activity, which has a share as high as 60 per cent in the GDP, are scanty.”

Further, this poor quality of data is frequently and significantly revised, making things even more difficult for policymakers. And this possibly led YV Reddy, Subbarao’s predecessor at the RBI, to quip: “Everywhere around the world, the future is uncertain; in India, even the past is uncertain.”

Long story short—sometime around this time next year, the GDP for October to December 2016, is likely to see a significant revision.

The column originally appeared in Daily News and Analysis (DNA) on March 9, 2017

The Govt Can’t Keep Driving GDP Growth

On March 1, 2017, I wrote a piece titled, Believe in Indian GDP Growth at Your Own Peril. I got many responses to the piece. Some readers, as always, accused me of being a Congressi To them I suggest please read my writing before May 2014. Also, life is not binary at the end of the day. There is a little more to it than just that.

Some others asked if I was suggesting that the government is fudging the Gross Domestic Product(GDP) data. Not at all. I have no evidence of the same. All I was saying was that there are multiple data points which show that the Indian GDP growth just did not feel right and pass the basic smell test.

During the course of last one week, the chief statistician of India, TCA Anant, has given several interviews to explain the deficiencies in the way the Indian GDP is measured. And these deficiencies I feel have led to the GDP being overreported. (I suggest that readers looking for greater detail Google up and read Anant’s interviews).

In fact, there is another point that needs to be made here. One way of measuring the GDP is through the expenditure method. This involves the summing up of private consumption expenditure, government consumption expenditure, investments and finally net exports (i.e. imports minus exports).

Now what happens if we subtract the government expenditure from the GDP number measured through the expenditure method. How much does the remaining GDP grow by? Look at Figure 1.

Figure 1 

As per Figure 1, the GDP growth without taking the government expenditure into account during the period October to December 2016 was 5.6 per cent. This was 140 basis points lower than the overall GDP growth of 7 per cent. Why has this happened?

Take a look at Figure 2. It makes for a very interesting reading. It essentially shows what portion of the increase in GDP between years comes from an increase in government expenditure.

Figure 2 

What does Figure 2 tell us? From forming next to nothing as a part of the increase in GDP between the years, for the period October to December 2016, an increase in government expenditure made up for 26.64 per cent of the increase in GDP.

Hence, for every Rs 100 increase in GDP, increase in government expenditure made up for Rs 26.64 on an average. As we can see during the course of this financial year, an increase in government expenditure has been responsible for a greater proportion of the increase in GDP.

The government spending more to get an economy out of trouble is standard operating procedure. They need to be seen to be doing something and this all they can do.

Nevertheless, there are problems with this approach. The trouble is that this way of creating economic growth by the government spending its way out of trouble, cannot continue indefinitely. At the end of the day the government has a limited amount of money at its disposal. Further, its expenditure tends to be terribly leaky and does not reach a major portion of those it is intended for. Also, the multiplier effect of private expenditure is better.

If India has to continue growing at greater than 7 per cent, then investment needs to pick up and that doesn’t seem to be happening currently due to various reasons. Given that I keep discussing these reasons, I will give them a skip here.

Take a look at Figure 3. It shows the portion of the GDP formed by gross fixed capital formation, a measurement of investment.

Figure 3 

The gross fixed capital formation as a percentage of GDP has been falling over the last few years. This figure needs to start going up, if a genuine economic recovery which creates both jobs and prosperity, needs to take place. And increased government expenditure cannot do anything about this.

The column originally appeared on Equitymaster on March 7, 2017

More to GDP Than What Just Media Talks About

GDP_per_capita_(nominal)_2015

Even if you are the kind who avoids reading business as well as economic news, you can’t avoid coming across the term GDP or Gross Domestic Product, time and again. If the GDP goes up at a fast rate, the economy is doing well. If the GDP doesn’t go up as fast as it is expected to, the economy is not doing well. And if the GDP contracts or falls, then god help us!

At least this is how the mass media talks about the GDP.

But what is the GDP? John Lanchester defines the term in How to Speak Money as: “The measure of all the goods and services produced inside a country.” It is a sort of a measure of the economic size of any country. Changes in GDP measure economic activity.

The trouble is that, at the end of the day it is a theoretical construct and there are problems with it. As Lanchester writes: “Many good things don’t contribute to GDP and many bad things do. The famous-to-economists example is divorce: when people get divorced they pay lots of lawyers’ fees. This adds nothing to anybody’s happiness except the lawyers’, but it adds plenty to the GDP.”

Then there is the problem of how to go about measuring the services part of any economy. As Diane Coyle writes in GDP—A Brief but Affectionate History: “The main input in a services business is the time spent by the employees on their job. What is the output of a teacher, though? Number of children processed through school? The average grade they attain on leaving? The highest subsequent qualification the children attain on average, or perhaps their lifetime earnings?”

Of course, these are not easy questions to answer. Then there are many other things that the GDP overlooks. As Rutger Bregman writes in Utopia for Realists: “Community service, clean air, free refills on the house – none of these things make the GDP an iota bigger. If a businesswoman marries her cleaner, the GDP dips when her hubby trades his job for unpaid work.”

The point being that GDP does not take into account unpaid work. As Bregman writes: “Or take Wikipedia. Supported by investments of time rather money, it has left the old Encyclopaedia Britannica in the dust – and taken the GDP down a few notches in the process.”

A lot of other unpaid work from cooking to babysitting to breast feeding children, which form a major part of daily lives, goes unmeasured as well. One reason for this might lie in the fact that a lot of the free unpaid work is carried out by women. As Coyle writes: “Generally official statistical agencies have never bothered – perhaps because it has been carried out mainly by women.”

Further, GDP does a very bad job of measuring advances in knowledge and technology. As Bregman writes: “Our computers, cameras and phones are all smarter, speedier and snazzier than ever, but also cheaper, and therefore they scarcely figure. Where we still had to shell out $300,000 for a single storage gigabyte 30 years ago, today it costs less than a dime.” Also, free products like Skype, which make our lives a tad easier, lead the GDP to contract.

Also, it is worth remembering that any sort of destruction adds to the GDP. As Lanchester writes: “Your house has just burnt down, and you’ve lost everything. That’s too bad; on the other hand, it’s great for GDP, because you’re going to have to rebuild it and re-buy all your stuff.”

This is precisely what happened to Japan after the Sendai seaquake in March, 2011. The total damage estimated by the World Bank was estimated to be around $235 billion. Nevertheless, things soon started to improve.

As Bregman writes: “After a slight dip in 2011, the following year saw the country’s economy grow 2%, and figures for 2013 were even better. Japan was experiencing the effects of an enduring economic law which holds that every disaster has a silver lining – at least for the GDP.”

The point being, there is a lot more to the GDP, than the media talks about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on May 11, 2016