GDP: Both Subramanian, govt may be right

V Kumaraswamy | Updated on July 22, 2019

The impact of efficiency gains and nascent informal sector activity need to be better understood to decide on estimates

Former chief economic advisor Arvind Subramanian has argued that the figures of GDP growth are exaggerated.

Taking both nominal and real GDP into account, both Subramanian and the government could be right in their own respective ways.

It is possible that two contrary factors are at work in the economy, the first impacting the nominal GDP and the second, the real GDP.

First, an increase in efficiency gains unaccompanied by a rise in demand for goods and services could lead to a fall in prices, and hence of value added in nominal terms.

Second, the informal sector activity in areas such as rural housing, roads and toilet construction is not possibly being captured by the data.

The net result of these factors is not easy to ascertain.

Let’s examine the impact from the viewpoint of efficiency gains.

BusinessLine published a few weeks ago (‘GST on the Highway’, June 4, 2019) the story of a reporter’s journey with a truck driver from Chennai to Bhiwandi.

He reported reaching the destination in 42.35 hours instead of the four days it would have taken not so long ago.

Efficiency gains

The driver saved two days for his owner, and as a bonus, pocketed the petrol he managed to save from the 400-litre allowance he was allowed for the trip. This was confirmed to the writer by an official of a leading transport company, who claimed that it takes 44 hours to reach Madurai from Dharuhera (Haryana) these days instead of the four days previously, carrying cars.

Only 15 per cent of potential savings have come from the GST so far; the balance has come from better roads and better driver crews who operate as a team.

Let’s construct (with some leniency in calculations) the effect of such savings on the nominal GDP in different scenarios.

The volume of final services has not gone down, but the nominal GDP has fallen sharply.

If the final price remains due to market demand and supply, the GDP will remain the same.

If the consumer pays less, the nominal GDP will fall due to the efficiency gains, unless there is a 50 per cent increase in other economic activities to absorb the truck and the driver’s time (unlikely), or we start measuring the value of the driver’s leisure as equivalent to the value of wages.

The effect of improved efficiencies on the nominal GDP is hence paradoxical, but true.

That’s the exact reason (but contrarian effect) why big earthquakes and natural disasters are big boosters for GDP growth.




Reconciling the two

India’s new normal, a real growth rate of 7 per cent, looks plausible. But there has been a drop in the exports in the last five years of some commodities, such as rice, raw cotton, meat and oil cakes; construction activities have been hit, the GST and demonetisation have hit some cash-dependent or tax-evading activities, and dumping by China has clipped the growth in the steel and tyre industry.

These may have been made good by growth in insurance services in rural areas, banking services through Jan Dhan, massive spread of LED bulbs and the construction of toilets on a massive scale.

They may have compensated for the decline in other areas, and hence the government’s stance of 7 per cent real growth cannot be dismissed.

Revisions in the GDP calculation approach takes years, and they lag changes in the structure of the economy by a considerable time.

Hence, it is quite likely that many new sources of growth are not being captured properly.

Likewise, without these services in the estimate samples, the ex-CEA’s estimates may well be true.But the real joker in the pack may be the efficiency gains in the economy.

The last few years have seen significant gains in several areas. LED bulbs have grown rapidly saving huge amounts of electricity. Industries have also invested significantly in energy and utility savings.

Banking has gone largely digital — as have airline and railway tickets — cutting down on long queues and wasted time.

Solar energy has largely eliminated the operational expenditure component in energy generation. This has led to vastly reduced levels of consumption of fossil fuel.

Digital books vastly reduce the consumption of paper; Netflix reduces trips to the theatre.

Nominal impact

As illustrated in the table, such efficiency gains have a dampening effect on the nominal GDP, unless the productivity increase is offset by rise in demand.

It is possible that the impact of productivity gains, in the form of a lower capital output ratio is positive on the real GDP, but not on the nominal GDP in the short run.

The impact from reduction in corruption is another factor to contend with on the demand side.

DBT reaches the beneficiaries without leakage alright; but they have also taken away the jobs of several intermediaries and fixers.

This has contributed to the loss of several layers of jobs, even as it resulted in convenience, reduced costs, and saved loads of time for beneficiaries.

With the impact from the above factors, the GDP may have fallen as contended by the ex-CEA.

The writer is the author of Making Growth Happen in India

Published on July 22, 2019

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