I was recently at a conference where an eminent economist said it’s time to move beyond gross domestic product (GDP) and use broader measures in our discussions.
His observations were clearly influenced by a recent report of the UN Secretary General’s High-Level Group titled, Counting what Counts: A Compass of Progress for People and Planet. His remarks prompted a question.
Economists have debated the limitations of GDP for more than half a century. Yet, despite repeated calls to replace it, GDP remains the single most influential statistic in economic policymaking. Why?
The debate on moving beyond GDP often overlooks an important fact. GDP today is much more than a measure of economic activity or welfare. Over the past seven decades, it has become deeply embedded in the institutional architecture of modern economies.
Governments use it to frame fiscal rules and budgets; financial regulators use it to monitor systemic risks; investors use it to assess sovereign and corporate performance; and international organizations use it to determine contributions and voting rights.
The question, therefore, is not simply whether GDP is an imperfect measure—which it undoubtedly is—but whether any alternative can perform all these functions with equal credibility and comparability.
One way to understand how GDP becomes embedded in governance is to examine why governments use it in routine budget-making. A recent OECD report on revenue statistics shows that since 1965, aggregate tax revenue as a share of GDP has remained remarkably stable, rising by about 9 percentage points.
For most mature economies, the tax-to-GDP ratio stays within a narrow band for long periods unless there is a major policy reform or structural change. In India too, the ratio has gradually increased, from 13% of GDP in the early 1980s to around 19% more recently.
This stability is of great use to finance ministry officials, enabling them to forecast tax revenue for budget-making.
A consequence of this medium-term stability is that it leaves a big hole in the arguments of critics who, in recent years, have been saying that India has been overestimating its GDP.
Since aggregate tax revenue is a tangible measure audited by an independent agency, mismeasurement of GDP should have led this ratio to fall, but it did not.
GDP has also been embedded in many pieces of legislation. In India, for instance, the Fiscal Responsibility and Budget Management (FRBM) Act mandates that the Union government maintain its fiscal deficit at 3% of GDP. (That it has not done so for the last two-plus decades is another story.)
This provision was inspired by a 1992 treaty of the European Union (the Maastricht Treaty, i.e.), which required EU member states to keep their budget deficit at 3% of GDP.
In addition, GDP is used as an anchor in many legislative or regulatory frameworks. Thus, we have a Nato agreement on defence spending by member states; EU merger guidelines are triggered when the turnover of the concerned companies exceeds a specified percentage of the member country’s GDP, and so on.
The various metrics proposed in the UN High-Level Group’s report, while practicable, do not yet have cross-country comparability or methodologies that permit their use in a similar manner.
In addition to governments, private actors such as sovereign risk-rating agencies, bond and equity market investors, and multinational corporations use country GDP estimates and related indicators, either directly or as a key numeraire, while planning their activities. The UN and associated multilateral agencies use GDP and related indicators to assess member contributions.
These examples can be expanded. GDP or GDP growth is not merely an indicator of a country’s performance; it has now become a key component of the architecture of global governance. The widespread adoption of GDP by a wide range of stakeholders is not because they believe it is a perfect measure, but because it possesses three attributes that few other indicators combine.
First, it is produced regularly using an internationally agreed methodology, making it comparable across countries and over time. Second, it is sufficiently stable and well understood to serve as the basis for legislation, regulation and contracts. And third, it enjoys institutional legitimacy: governments, markets, multilateral agencies and courts accept it as an objective measure for setting fiscal rules, allocating resources and monitoring performance.
Most proposed alternatives satisfy only the first of these conditions. Very few possess all three. To use an economist’s term, GDP has become more than a statistical measure; it is a network good. Its acceptability is driven substantially by the fact that others find it useful.
Other indicators, therefore, face a huge challenge before they can replace GDP.
This discussion should not lead us to conclude that the call to reform GDP measurement is without merit. The path forward is very different.
The UN Statistical Commission outlined a solution to these challenges. The recently adopted System of National Accounts (SNA) 2025 does not seek to replace GDP with a broader measure of well-being or sustainability. Instead, it embraces a philosophy of “change with continuity.”
It preserves GDP as the internationally comparable measure of production while expanding the statistical system through distributional accounts, environmental-economic accounting, and new measures that reflect digitalization and globalization.
Rather than abandoning GDP, SNA 2025 recognizes that it has become too deeply embedded in the institutional architecture of governments, markets and international organizations to be replaced.
The answer, therefore, is not to move beyond GDP, but to build around it.
The author is a visiting professor at the Institute for Studies of Industrial Development and former chief statistician of India