Home / Opinion / Views /  The fallacy of equating growth with the pursuit of higher GDP

There’s been much hand-wringing in India about the possibility of Bangladesh overtaking India on per capita gross domestic product (GDP). This may be transient and will surely be reversed once our growth picks up towards the end of 2020-21. But the real message from the International Monetary Fund’s World Economic Outlook is not about growth, but the underlying dynamics that may have propelled a rise in Bangladesh’s GDP per head. Most observers agree that its better social indicators are among the reasons for this.

Macroeconomists and politicians in general have invested too much in the idea of GDP growth without considering its quality. They seldom discuss the possibility that growth is no longer a good enough barometer of underlying economic health.

The Narendra Modi government has been hauled over the coals for the 23.9% drop in GDP in the April-June quarter, but gets no pats on the back for the long-term investments made in improving social indicators—toilets, electricity connections, pucca homes, financial inclusion, and piped water for all households. The last is still a work in progress, but these will deliver improved social outcomes after a lag.

We make our governments overly conscious of topline GDP growth and wrong-foot them on policy choices. Initiatives focused purely on raising growth will deliver suboptimal results. We must see growth as an outcome of all our efforts to improve the health of various job-creating sectors—and of people at large.

If one were to go back in the Modi tenure, the high GDP growth numbers thrown up by our new gross value added (GVA) methodology effectively blindsided the Centre to the underlying rot in the economy, several sectors of which were under water, and both corporations and banks were reeling under the deadweight of unrepayable debt. This is why the bad loans crisis began to be seriously addressed only after 2017, by when it was getting unsustainable.

There is a general assumption—and it is not wrong—that growth is the answer to many economic problems. At the very least, it generates high tax revenues, which can then be used to address poverty directly and create artificial jobs through schemes like our rural guarantee scheme. It can enable cash payouts to poor farmers. But we should ask why the high-growth years of the United Progressive Alliance did not deliver better jobs than the Vajpayee era.

The fact is growth does not significantly improve underlying economic strength, as it can be driven by any factor of production, and post-2000, it has been driven mostly by automation.

In the US, between 1970 and 2018, the inflation-adjusted, three-member median household income rose from $50,200 to $74,600 (in 2018 dollars). That’s a 48.6% rise over 48 years. But here’s the underlying reality: Most of this growth was between 1970 and 2000, with the annual increase being 1.2%. After that, it fell to 0.3%. One can blame the Great Recession for it, but the fact remains that while growth returned, incomes didn’t rise commensurately. After 1991, recovery of jobs after recessions has taken longer and longer. A Ball State University study in 2015 indicated that 88% of job losses in the US were due to automation and productivity, not trade. If this can happen in the US, which has flexible labour markets, consider how much more India may be losing to automation.

In India, we have to contrast the growth rates of 2014-2018 with a dramatic fall in employment elasticity from 0.3-0.4 in 1999 to 0.1-0.2 now. This means even if growth were to rise to 10%, which could happen next year on this year’s low base, jobs will rise by only 1-2%. Growth has lost its link with jobs.

The economic structure is changing so sharply that estimates of growth based on organized sector numbers are losing validity. Post demonetization and the goods and services tax, estimation of overall GDP from formal numbers went awry as formalization hurt the informal sector more. This wasn’t captured.

But factories are more automated than ever. So are big farms. Digitization has knocked out middle- skill jobs and shifted them to lower-skill gigs. When technology reduces the level of skills required for a job, those who were earlier getting good-quality jobs with middle skills lose out. Technology also commoditizes paid jobs, as amateur hobbyists can now do similar work for a lark.

Post-covid, with work-from-home here to stay for many companies, incomes will grow slower for both office and gig workers (though it may impact women’s employment positively). But the GDP rate itself may not be impacted much, as we saw in the demonetization year. In 2016-17, Indian GDP registered its highest growth (8.26%) under the National Democratic Alliance, despite the disruption of cash-based sectors.

This does not make GDP calculations worthless, but the real focus should be on sectors. More than macroeconomics, sectoral understanding and microeconomics ought to be central to policy-making. Future GDP will best be estimated as a sum of its parts, and not as a whole extrapolated from numbers in the more visible parts of the economy. That is where we went wrong after demonetization and GST.

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