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Friday, 10 Sep 2021
A newsletter that demystifies complex economic jargon and explains how it impacts your everyday life
By Vivek Kaul

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Whose GDP is It Anyway?

On 31 August, the gross domestic product (GDP) data for the period April to June was published. India’s GDP grew by 20.1% in comparison to the same period in 2020. This was growth in real terms adjusted for inflation. In nominal terms, the growth was at 31.7%.

The GDP of a country is a measure of its economic size during a particular period.

The growth on its own looks terrific. But what needs to be kept in mind here is that the GDP during the period April to June 2020 had contracted by 24.4% in real terms.

Also, the GDP for April to June was even lower than the GDP during April to June 2018.

Further, if we look at private consumption expenditure, which is the most critical part of the Indian economy, it was almost the same as during April to June 2017. Clearly, there is a problem, the immediate annual GDP growth notwithstanding.

April to June 2017. Clearly, there is a problem, the immediate annual GDP growth notwithstanding.

A few friends and acquaintances read the pieces I wrote on what the latest GDP figure signifies when it came to the state of the Indian economy and responded on WhatsApp. One gentleman pointed out that he couldn’t see any slowdown/contraction that I was talking about. He works for a unicorn, and life couldn’t have been any better.

He went on about how he was having a tough time filling up a few vacancies in his organization. “So where exactly is this slowdown?” he asked. “Because when I look out of the window, it’s very bright and sunny out there.”

A few other people responded with their own stories on how well their respective companies/businesses were doing. So, essentially, all this slowdown/contraction talk was basically rubbish.

Of course, they are not wrong about their respective experiences. But the GDP/GDP growth figure doesn’t just reflect only the businesses/companies that they are a part of. It is a summation of the overall state of the economy.

As Michael Blastland writes in The Hidden Half – The Unsee Forces That Influence Everything: “Average knowledge is often all we have, all we can work on, all that we normally discover. But strong average knowledge can be feeble about you… The whole, taken as a whole, can easily mislead us about every single constituent – as some places boom while others die, none of them equal to the average.”

Let’s take an example to understand this better. Domestic car sales have been stagnating over the last few years. A couple of years back, after I wrote about this, I was asked, but what about MG Hector. This specific car brand was doing very well. The trouble was that the company accounted for less than 5% of the overall car sales at that point. Hence, yes, it was doing well, but the overall car sales were still stagnating.

The same is true about the GDP. It is an overall figure made up of many constituents, and given that, the conclusions we can draw from the whole can be different from the parts that it is made up of. This is a point that many people seem to forget when they look at the economy from just their very limited economic existence.

Over the years, GDP growth has become the most popular way of analyzing how well a country is doing economically. Or, as Sanne Blauw puts it in The Number Bias, the GDP has “the power of being able to summarise the national economy in a single figure”. And that’s its best and worst part.

As Blastland writes: “The ability to see the big picture is a virtue, we’re told. No doubt, but it’s not without its dangers. There are things the big picture doesn’t tell us, about what might be lurking in its shadows, in every variation of pigment. The big picture is as partial a piece of knowledge in its own way as each of the many small pictures it contains.”

We shall try looking at the many small pictures that make the Indian GDP. But before we do that, we need to take a slight detour.

A short history of GDP

The Great Depression started after the stock market crash of 1929. Post that, the American economy was in a big mess. The trouble was nobody knew how bad things really were. This is not to say that there weren’t any economic figures going around at that point in time. There were. But just that, forming an overall picture based on what was available was proving to be difficult.

As David Pilling recounts in The Growth Delusion: “When Franklin D. Roosevelt became president in 1933, [Simon] Kuznets was entrusted with the task of creating national accounts… His notion was disarmingly simple: to squeeze all human activity into a single number [emphasis added].”

In January 1934, Kuznets came with the first report, which suggested that the American economy had almost halved in size in the three years following the stock market crash that led to the Great Depression of 1929.

Kuznets’ national income measure, as he had called it, did not include government expenditure in it. His contention was that most government spending “including on such things as roads” was “a so-called intermediary cost “implicit in our economic civilization.””

Nevertheless, in the late 1930s, countries were getting worried about another war after the Great War. If all this government spending did not go into Kuznets’ so-called national income calculation, the governments would find it difficult to justify it.

This is when the British economist John Maynard Keynes entered the debate and perhaps offered the politicians a way out, leading to the GDP’s birth. As Pilling writes: “To Keynes, this was a conceptual error. If government expenditure was excluded, then whatever the state spent on the war effort would count against economic growth in the national accounts [another fancy term for GDP]. The more the government spent, the less there was available for private consumption and investment…. The government had to be considered part of the economy.” This is how the government became a part of the GDP calculation.

At its most basic level, the GDP is the sum of private consumption expenditure, investment into the economy, government expenditure and net exports (exports minus imports). This is where we shall now look.

The devil is in the detail

Private consumption expenditure, or the money that you and I spend on buying things, forms a bulk of the Indian economy. Take a look at the following chart.

The share of private consumption in the Indian economy during the April to June period stood at 55.8%. This was the lowest in more than eight years since January to March 2013, when it had stood at 54.8%. This weakness in consumption can be seen in other data points as well.

The sales of fast-moving consumer goods companies, which primarily sell daily-use items, everything from toothpaste to washing powder to biscuits, have been flat for the last three years.

Further, loans given by banks with gold jewellery as collateral have risen by 66.7% from April to July this year, from the year earlier. The non-banking financial companies have seen a similar boom in lending against gold jewellery.

Anyone who knows something about Indian families would understand that borrowing against gold is the nuclear option, which is considered only once all other options fail. Along with this, pages and pages of newspaper notices tell us that defaults on these loans have also gone up.

Further, domestic two-wheeler sales and car sales have been stagnating for a few years now.

These are just a few examples of weak consumer expenditure over the years. All this tells us that the current consumer confidence when it comes to the economic future is weak. The Centre for Monitoring Indian Economy’s consumer sentiment index is at half the level it was two years back and considerably lower from where it was three years back and even four years back.

Why is this happening?

It is very difficult to draw a clear linear explanation for anything as complicated as the economy. Nevertheless, one possible explanation for this is the fall in investment as a proportion to the GDP or the overall economy, as can be seen from the following chart.

As can be seen, investment in the economy has been falling for many years now. This has impacted income growth. The growth in GDP per capita (a measure of the average growth in income) in 2010-11 had stood at 18.3%. Since then, it has seen a predominantly downward trend, and in 2019-20, the growth was down to 6.6%. In 2020-21, it contracted by 4%.

For income growth to pick up, investment needs to go up to create jobs, put more money in the hands of people, and thus spur economic activity. The trouble is that many businesses are not in a position to borrow. Even if they are, the capacity utilization in many sectors continues to be low, which means that producers do not need to expand unless consumer demand rises to justify it.

Consumer demand is a function of income growth. Income growth, in turn, depends on investment—a classic chicken and egg story, which is proving difficult to break.

How do we break this?

If we look at the history of economics post the Second World War, the governments have spent their way out of economic trouble. Take the case of what happened in the US during the Great Depression, once government expenditure was fully entrenched in the GDP calculation.

As Pilling writes: “The government spent massively on public works, farm aid, and social security in order to pull the US economy out of its seemingly interminable recession.”

Many governments have done the same since then. The idea is that as the government spends money on various projects, somebody benefits because of that in the form of higher income. They spend that money benefitting others. This starts a virtuous circle and ultimately leads to higher economic activity and economic growth.

The government has been doing that. In 2020-21, the share of government expenditure in the GDP stood at 12.5%, the highest it has ever been since 1950-51. In fact, the share of the government expenditure in the economy during April to June was at 13.7%.

But even at 13.7%, the government expenditure is a small part of the economy. Also, what does not help is that the liabilities of the central government and the state governments as of March 2021 stood at 91.7% of the GDP, the highest in 15 years, limiting the government’s hand to spend its way out of trouble. It’s already highly indebted.

In all this, the good news is on the exports front. From April to June, the exports of goods and services (in rupee terms) went up by 19.5% from a year earlier. Indeed, this has been a ray of hope.

While it is important to see the big picture that the GDP figure offers, it is also essential that it shouldn’t be the be-all and end-all of all argument and analysis, as it often tends to be the case these days.

As Blauw puts it: “These days politicians and policymakers tend to forget that GDP is an invented concept and use it as an objective measure… But GDP is not a concrete measurement like gravity. You do not make it any more real by sticking a number onto it… We are in the grip of yardsticks of our own making.”

It is also important to understand that people’s lives are not led in the way of a “big picture as a population on an average.” Each one of us lives our life in particulars and not in the big picture average. I write for a living, you probably work for an IT company, and a third person probably sells pakodas for a living.

And all of us have been economically impacted in different ways in the recent past. Unfortunately, the GDP figure hides these details.

As Blastland writes: “The lives we lead are experienced in a world of particulars, alone or in smaller groups, smaller communities, smaller pictures. The question is, what happens when we take insufficient heed of these particulars. If the detailed, small pictures of people’s personal lives aren’t consistent with the big picture drawn by the state, will they trust what the state tells them?”

In this scenario, it is vital for economists, policymakers and politicians, to not get obsessed with the GDP figure, as some tend to do. Also, it is worth remembering that the GDP doesn’t do a good job of measuring the informal part of the economy, where most of India’s economic pain has been felt in the last few years.

Of course, judging the life of every citizen is not possible, but getting a sufficient amount of detail is. Enough data is going around for that. The government can also commission detailed surveys.

While this is true, the opposite is true as well. Just because someone is doing well or the specific sector that the person is working in is performing well, doesn’t mean all is well at the aggregate economy level. And this is a lesson for life. The part may not always reflect the whole, and the whole rarely reflects every part.

To conclude, even good quality milk, clean water and great coffee imported from South America cannot ensure that the final product is drinkable if the balance of the ingredients is not right. The good thing is that you can get the coffee made again. The economy isn’t like that.

Vivek Kaul is the author of Bad Money and was once labelled Twitter’s favourite economist. Have any feedback? Send in your bouquets and brickbats to him on Twitter.

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