GDP growth

Economist, London

‘ GDP yardstick is badly flawed as a guide to a nation’s economic well being. A nation’s well being depends on many factors ignored by GDP, such as leisure time, income inequality and the quality of the environment.’

During the last few years, i.e., when India leaped out of the sedentary ‘ Hindu ‘ growth rate of 3% or so, Government / fourth estate have been going ‘ ga ga’ over the +8% growth and all sorts of chest thumping prognostications are made of India overtaking USA in terms of gross production growth by 2020 or 2030 or so. Aware of the limitations of GDP as a yardstick of growth, economists are often circumspect on the subject. World over, increasingly more and more ‘wise-men’ have started making contrary noise on high GDP growth, with its ill effects on ecology, fast depletion of natural resources, wastages, etc., They also point out that quite often the benefits of high GDP growth do not percolate to low income people, whereas the negative factors of such high growth will have to be borne by all people and possibly more by poor people.

Arun Shourie:

‘The way GDP is measured yields at best a very gross estimate of productive activity in the country. In spite of everyone knowing this, the slightest fluctuation in the estimated GDP becomes the basis for elaborate theses – for gloom or elation. The imperfections of measurement apart, what has grown in the reference period is almost never the object of scrutiny.’



( The large number of cases before the various courts in India would indicate that we are a litigant prone people. Related to the subject under discussion, processing such a large number of cases by courts, does add to the level of GDP growth, because income accrued by service rendered is included in GDP. Alcohol and cigarette consumption goes up. The same improves the level of GDP. More gossip magazines come into the market. That also adds to GDP ).

With India achieving higher levels of GDP growth and maintaining that high level during the last few years, anybody and everybody and fourth estate have been cheering / mourning / comparing India’s position at a particular time with the position obtained in other countries. GDP is now taken as the yardstick / mantra for economic growth. While it is the prime indicator of economic growth, there are a number of related factors which are over-looked.

· GDP yardstick was developed primarily as a measuring tool to assess growth / deceleration in production of goods and services during a particular period. It is a tool for Governments for planning the development growth of a country.

· Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually




· calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.

· Economists are aware of the limitations of this yardstick. Growth is not synonymous with equity. Growth has also to be looked into from the perspectives of the level of inflation, equitable distribution of the benefits of growth, level of employment creation, etc.,

· There is wide-spread misunderstanding on these fundamentals and how they affect individuals. Consistent high level of GDP growth is the wish list of all, individuals, Government, economists, etc., since the same is supposed to result in production of more and more goods, consequent to which employment opportunities increase and both these developments would have trickle down effect. People would be better clothed, better fed, will have money to meet not only expenses in living but will enable to meet various demands because of increased income. But this is hypothesis.
· On the other hand, high level of growth could result in trickle down effect. Over a period of time the poor would also be benefited because of the increase in the size of the cake.

· Once production growth takes place, distributive justice, to the extent of not happening could be repaired.


The negative factors related to higher growth:
· Growth will have adverse effect on the quality of life because growth to a large extent would affect environment ( more mining, more pollution, cutting of trees, etc., )
· Growth leads to creation of artificial needs. Industry cause consumers to develop new tastes, and preferences for growth to occur. Consequently, "wants are created, and consumers have become the servants, instead of the masters, of the economy."
· Resources ( e.g., mines, forest cover ) are depleted at a higher rate for which the generations to follow would have to pay a higher price.
· The gap between the ‘ haves ‘ and ‘have nots’ would go on widening with attendant social problems ( During the period of high growth level, the benefit of the growth would be taken in a disproportionate manner by the ‘haves’)
· Creation of high consumption society, which is the case of Western countries, is at odds with the ethos of Indian society of simple living. Consumption level being taken as synonymous with happiness level is a


concept, which many thinkers and sociologists question.

To a large extent the absurdity in the assumption that high GDP growth would automatically improve the lot of the people has been exposed by the following pithy write up with imaginary developments.

Arun Shourie

‘To encourage growth in the North East, the Finance Minister announces excise concessions for industries that will be set up there. Cigarette companies, firms producing pan masala rush to the region. That is growth! ( and hence factores in measuring GDP growth level ).

X is a small businessmen. Producing the car in which he goes to office increases the GDP, and therefore counts as growth. That the dealer shovels his margin into the price, increases the GDP, therefore that too boosts growth. If X does not have money to buy the car on his own, and borrows from the bank, better still – he helps expand the financial sector too, and thereby his car increases the GDP twice over. He can contribute to growth even more by not repaying the loan – the bank then has to deploy lawyers, and hoods, and the money it shells out to them is all growth

If, while X is at office, his car gets stolen, and the police set a posse to catch the thief – growth, for salaries of the policemen form part of GDP. The traffic jams, the difficulties in repaying the loan, the accident, the tussle with the insurance company, the lawyer’s fees, X turning to a



psychiatrist. The doctor puts X on mood boosters – growth. The drugs, the bills, the troubles in office, the failing business run X’s family relationships. His wife sues for divorce. Like her, X too engages a lawyer. The case takes weeks and weeks of the court’s time – growth several times over.’
Summing up:
· There is spurt in production of, say, cotton and Natural Rubber. Related to the weightage given for these items in the GDP Index for calculation of growth / deceleration, GDP increases. But the higher production may bring down the price of these two items, affecting the growers of the same.
· Mechanisation, computerisation, etc., may increase production of an item. Positive effect on GDP. But such a development possibly would also have a negative effect of reducing the level of employment.
· Cigarette and liquor demand goes up and hence production also goes up. Improves the GDP. But what about the negative effect on people.
This is not to argue against higher level of economic growth on a sustained basis. It is only to caution on the negative sides. The media, economists and also Government have made it appear as if higher level of growth is the panacea for ills ( poverty, unemployment, sickness, etc., ) afflicting the country. But such growth has also its down-sides, which should not be forgotten and Governments have to intervene in ensuring that the benefits of higher level of growth percolates to those who are down and under.
If higher GDP growth is an unmixed blessing, then with reasonably higher level of growth in India during the last few years, poverty and unemployment level in the country should have come down sinificantly. But many are of the view that this has not happened. The main reason is that the trickle down theory has not happened effectively or widely.
India is still 128 in the ranking of Human Development Index done by UN Agency.
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