Is GDP a Good Indicator of India’s Economic Health?

In a Media Interview, India’s Former Chief Statistician Disagrees

Newsreel Asia Insight #61
Dec. 2, 2023

In an interview with journalist Karan Thapar for The Wire, Pronab Sen, India’s former chief statistician, shed light on a crucial aspect of our economy – the way we calculate our Gross Domestic Product (GDP). For many, GDP might be a distant, abstract figure, often mentioned in news headlines but rarely understood in its full context. However, Sen’s insights reveal why this figure, and the way we measure it, should matter to us all.

At its core, GDP represents the total value of goods and services produced in a country. It’s often used as a shorthand to gauge a nation’s economic health. A rising GDP is seen as a sign of prosperity, while a declining one signals trouble. But as Sen points out in the interview, the story is not that straightforward.

Sen challenges the notion that India’s GDP calculation accurately reflects our economic reality. He disagrees with the view that India overestimates its GDP growth, explaining that India relies on the “production approach” due to limited data on income and expenditure. This method, while the best available option given our data constraints, is not without its flaws.

Imagine GDP as the total amount of money a country makes from the goods and services it produces in a year. However, to understand how much the economy has genuinely grown, we need to consider inflation. If prices have gone up, the higher GDP might not actually mean the country is producing more; it could just mean things have become more expensive.

This is where a “GDP deflator” comes in. Think of it as a reality check tool. It adjusts the GDP to account for changes in price levels (inflation or deflation). By doing this, we get a clearer picture of whether the economy is genuinely growing in terms of production.

Now, the Wholesale Price Index (WPI) is one way to measure inflation. It tracks the price changes at the wholesale level – basically, the cost of goods before they reach consumers. However, WPI includes additional costs like transportation and trade margins (the difference between what it costs to produce something and its selling price).

Sen points out a concern here: using WPI as a GDP deflator might not be the best choice. Why? Because those extra costs in WPI (like transport and trade margins) might make inflation seem higher than what the average consumer experiences. If we use this inflated number to adjust GDP, we might end up thinking the economy is growing more than it actually is. It’s like measuring your height with shoes on and thinking you've grown taller, but in reality, it's just the shoes adding extra height.

Furthermore, the method used to estimate the contribution of the unorganised sector – nearly half of our GDP and a significant source of employment – is outdated, Sen says. It relies heavily on data from the organised sector, which may not accurately reflect the current state of the unorganised sector, especially in a post-COVID world where these two sectors have diverged significantly.

GDP influences government policy, investment decisions and international perceptions of our economy. If GDP data is inaccurate, it can lead to misguided policies that don’t address the real issues faced by ordinary citizens, like job scarcity, income inequality and the health of small businesses.

Sen’s critique extends to the use of GDP as the sole indicator of economic well-being. GDP is a flawed metric for assessing national welfare, he believes. It doesn’t account for income distribution, environmental degradation or the quality of jobs created. In essence, a growing GDP doesn’t necessarily mean that the wealth is trickling down to improve the lives of the average citizen.

For instance, if GDP growth is overestimated, the government might not prioritise job creation or support for the unorganised sector, directly affecting millions of workers.

A growing GDP might also mask the widening gap between the rich and the poor. Without understanding the distribution of this growth, we risk ignoring the struggles of a large segment of our population.

A critical aspect of Sen’s interview is his take on the recent findings of the Periodic Labour Force Survey, which showed that 58% of India’s workforce is self-employed. Contrary to interpretations of this as a rise in entrepreneurship, Sen sees it as a sign of distress employment. Many of these self-employed individuals are not thriving business owners but people compelled to take up low-income, unstable jobs out of necessity.

If a significant portion of our workforce is underemployed or in precarious jobs, it affects overall economic stability and personal well-being. It means more people struggling to make ends meet, less job security and more vulnerability to economic downturns.

Sen’s insights point to the need for better data collection and a broader set of indicators to assess our economic health.

Understanding the nuances of GDP and economic data might seem daunting, but it’s essential for informed citizenship. Our awareness and understanding of these issues enable us to hold our leaders accountable and advocate for policies that truly reflect and address the needs of all Indians.