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GDP!! Every 3 months in our country, we often hear news about this term GDP, meaning Gross domestic product. Whenever the GDP growth rate comes in headlines, we start talking about the economy, be it for a brief period. (why? Because Rhea Chakraborty, Shiv Sena and Kangana Ranaut are more critical. hehe) We talk that whether India’s economy is growing fast or is slowing down? Is the Indian economy strong enough? How many days will it take for India to become the superpower? Most talked about question always asked- Can India overtake China? Overall whenever the news of GDP numbers comes out, there is always a ruckus created. So, the question arises- What is this GDP growth rate?  And why should we be worried about it? Let’s try and understand.

What is GDP?

Let me ask you a question first. Let me consider that you want to know the state of the Indian economy, so how will you calculate and understand? I think first you will try and find out how big or small the Indian economy is in compared to other countries. Then figure out a way to calculate, but the question still remains what will be the math?

Once upon a time, this was very easy to calculate. It was easy to project and assess the size of the Indian economy. In olden times, to get an idea, we could just peek into the treasury of the emperors. If gold was in abundance, we could predict that the economy is stable, but if it was about to finish, we could say that it’s in a dire state. But as years passed, economic activities became more complex and understanding the economy became even more difficult. Today, we can’t look at a treasury to understand the Indian economy. Money is continually being created and spent in various ways. Many products and services are being sold, and cash is being earned through multiple modes. Even the government is spending on industries and money is also being earned through exports whereas spent through imports. In short, there are various ways in which businesses are being done, money earned, spent and invested. So, that is why indicators like GDP becomes so essential.

Consider the GDP of any country as a magic number, which gives you the idea of the size of the economy of that country and also indicates its health (i.e. good, bad, or OK). Here I have used two words, “idea” and “indication”. I am not saying that it exactly gives you the size and health of the economy of that country but only an idea. And how is that?  In a year, when we add the valuation of all the products produced and services provided, the number we get is the GDP of the country. Obviously, this number will be huge. So it is calculated by a formula-

GDP= (All products and services bought by the customers) + (All the money invested by a company in the country to expand themselves) + (All the money spent by the government on industries, companies, agriculture) + (Money earned by the country from exports – Money spent on imports into the country)

It looks like a very complex formula, but you are right! It is actually tricky because a countries economy is complicated as well. Now, how can we understand that the state of a country’s economy is good or bad? For this, we will use the GDP growth rate.

GDP growth rate is the rate at which a country’s economy is growing annually. Suppose 2019 data for GDP growth rate is 6% and that of 2020 projected is about 5%, then we can say we are growing at a slower pace than 2019. That is why, whenever we hear the news, its always in percentage. Because they are talking about the GDP growth rate. If we the GDP growth rate of the country increases every year, it has many different meanings: –

1.The demand for Goods and Services is increasing

2. Which means people have more money to buy goods and services

3. Which means people are earning more.

4. That means the employment levels of citizens are adequate.

Whereas if the GDP growth rate is falling, it means that country isn’t performing well enough.

1.The country hasn’t attracted many investors,

2.Goods and services have lesser demand.

3. Demand is less, then maybe consumers have less money to spend.

4. And if they don’t have money to spend which also means they aren’t earning enough.

5. That means the state of employment isn’t in good shape.

This is ONE way of interpreting the growth rate of GDP, but there can be various other interpretations as well.

Necessity to grow at a higher GDP rate

But why is it necessary that we grow at a higher rate every year. Like if we are growing at a rate of 5% instead of 6%, why is it such a big talking point? We are still growing, RIGHT??

The logic behind a higher growth rate is that the companies, individuals and economies will only invest in your country when they feel that the demand for their goods and services will increase in future. That is why the general idea should be to grow at a higher rate than the previous year.

When was the term GDP born?

Another curiosity that arises in your mind is, where did this concept of GDP come from? The story started in 1930 when the US was going through “The Great Depression.”

“The only thing to fear is fear itself”

– Franklin D. Roosevelt

In 1933, this is what the then US president Franklin D. Roosevelt said to all Americans to boost their morale. This was the time when Americans were losing jobs, becoming sick and losing their places to live because of an economic depression. The US government didn’t know what to control the situation. The major problem behind this depression was that the government didn’t have data to understand the cause. If the government wanted to create jobs, they should first know how many people were employed and unemployed. To increase the standard of living of the citizens, the government should know how much an average American earns. So, on the suggestion of a US senator, the US government decided to understand and predict the national income of 1929, 1930 and 1931. This responsibility was given to Simon Kuznets. Simon didn’t have a formula or a method to predict and hence had to develop a new approach to predict the total national income of the USA. This is where the concept of GDP was born.

Kuznets started the work by making lists of various sectors like agriculture, mining, factories, from where data could be obtained. A small team was given to him, comprising of 3 senior assistants and 5 statistical clerks.  All of them went on a long road trip where they visited factories, farms, interviewed owners and managers and started noting down the numbers. Basically worked from the ground level noting down all the numbers in a notebook and sent it to Washington. The plan Kuznets had was to compile all the economic activity of the country done by factories, companies and individuals and represent it into one number. This is how he created the foundation for GDP calculation. After him, many debated and discussed as to what should and shouldn’t be included in the formula of GDP.

Finally, in 1944, a significant conference took place called the “Bretton Woods conference” where it was decided that GDP would be used as an essential and standard tool to measure the economy of a country. This conference was attended by 44 states and following it, established international financial institutions such as the World Bank and the International Monetary Fund. Interestingly India also participated at the Bretton Woods conference, when it was a colony of the British. On India’s behalf, C.D. Deshmukh, the then governor of Reserve bank of India attended the meeting.

Factors that influence GDP growth rate

So, coming back to the point, let us understand that when India’s GDP growth rate goes up or down, what are the factors that influence and govern it.

Senior Journalist and author Puja Mehra tells the story of GDP growth rate of last 15-20 years. She is the author of “The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story.

Puja says – GDP growth rate in India for the last 10 years has gone through ups and downs. First, there was a global boom, and the global economy had been doing very well. So, the demand for exports, a lot of investment activities that were taking place and a lot of investment was made into India, which gave India’s economy a boost. A lot of new projects put up and a lot of jobs created and therefore, the GDP growth and the economy was doing quite well till 2008. And then in 2008, the recession hit the world.

If I have to define a recession in broad terms, it is the time when the economic growth goes down. The 2008 recession hit the US, but the impact was borne by the world. The banking, real estate and financial markets completely collapsed in the US, and millions lost their jobs, life savings and home. This impact was felt globally as the exports of various countries went down massively. India also took a hit. So, what did India do during that time?

Puja says- When such things happen, it is vital for economies to take policy measures. India did take various steps so that in 2 years, the GDP growth rate recovered but still not 9% before the recession hit.

The Indian government announced a mini-budget where it spent on infrastructures and reduced the tax rates. The GDP growth rate did recover for a short period. This was encouraging, but slowly things started becoming worse. These policy measures were considered as temporary medicine to arrest the global recession but were allowed for a more extended period. Certain policy errors were also made, which eventually resulted in the GDP growth rate to slow down. This means that certain policies which could revive the economic growth temporarily may not be a long-term solution. The recovery made slowly fizzled out, and the then UPA government was hit by major corruption scandals. This impacted the GDP even more. You might remember about 2G spectrum scam, CWG scam etc. A crisis hit the banking sectors as well. Finally in 2013, when the oil prices went up, it was a significant jolt to the Indian economy. By 2014, due to various factors, the GDP growth rate came drastically down.

Puja says- After 2014, there was a lot of hope because there was a lot of political change in the government. It was thought that policy changes will be taken to ease some of these problems, especially the banking sector.

Modi elected Prime minister of India in 2014

Basically, the same story repeated itself. Some policy measures were taken that improved the GDP growth rate but some policies backfired.

Puja says- New policy measures such as Demonetization, not very good GST structure which made it difficult for doing businesses, Not enough debts were taken that were currently growing in the banking sector. So, the growth which was observed initially now has slowed down for three years.

And now, Coronavirus!!

Puja says- Covid-19 was a fresh shock, which changes a lot of things, which will have its own economic consequences and GDP growth rate will indeed show that when it comes out.

And now we heard that in the recent quarter it’s -23.9%. Now we understand that there are various factors that influence the GDP. So whenever GDP growth rate goes up or down, all these factors influence it in some way or the other. So, the moral of the story is that there is no particular solution which can be singled out that can help the GDP growth rate to go higher every year.

Solution

There is one criticism which is most talked about over and over again- GDP is not the perfect measure to understand the health of the economy of a country.

Answer to this is YES and NO!

The truth is that there are many economists and experts in the world that believe that GDP is not the perfect indicator to measure the health of a country’s economy. We do need some better indicators if we want to measure economic growth. Many complain that GDP doesn’t take into account the population, distribution of resources, participation of people in the economy. Basically, this means that it is not necessary that whenever the GDP growth rate goes up, the standard of living of its citizens is improving. GDP growth high can also mean that a handful of companies and individuals are growing at a good pace, and the majority of sectors and population isn’t doing well.

Another consistent criticism which is also made is that GDP doesn’t account for unpaid labour and unpaid work. For example- If a housewife is working at home, it is not accounted in the GDP number. In India, also a constant debate has been going on whether GDP is a good indicator or not? Any definitive answer here is complicated, but in my opinion, GDP is still the most reliable indicator until we have a better and perfect indicator.

One such solution can be the Social Progress Index. What do you think about the current -24% GDP growth rate? Is it temporary and will recover in the next 2 years or it has reached an alarming situation? Let me know in the comments.

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