Friday, March 10, 2006

How to Increase GDP: Learning from Indian Budget

Last week, during the Budget Session, the Indian Finance Minister, Mr P Chidambaram, announced that the Indian GDP registered a growth of 7.5% during 2004-05, and is likely to grow at the rate of 8.1% during 2005-06.

This was a great news!!! - The Sensex jumped beyond 10,000 mark, the analysts commented on how India is (almost) catching up with China, Indian media had a hay-day with headlines, and the captains of Indian industry (self)-congratulated the government (since the gap between govt and industry is decreasing)....

In any case, to learn how one can sustain this kind of growth rate - in fact, to move to a growth rate of 10% - one must look at how we achived this.

For instance:

  • The government shifted the base year for calculating the GDP growth from 1993-94 to 1999-2000. This increased the GDP growth from 6.9% to 7.5%.

  • The weightage of certain fast-growing sectors in calculating the GDP was increased (e.g., for trade, hotels and restaurants, it was increased from 14 to 14.2; for finance, insurance, real estate and business services from 12.5 to 13, etc.)

  • New economic activities from the unorganised sector (e.g., milk production from camel, goat and buffalo; production of toddy and betel leaf; production of salt from sea water evaporation, meat production from unregistered slaughter houses, etc.) were included in calculating the GDP for the first time.


    As the FM said that "I believe that growth is the best antidote to poverty."... we have fianlly found a quick and sure formula for economic growth and eradication of poverty!!!!

    Er... lest one feels that there is anything exceptional and "wrong" about such "creative accounting", let us also have a look at how India's agricultural GDP showed a 9.1% growth during 2003-04 (i.e., when India was "shining";0):

    In 2003-04, India produced 212mn tonnes foodgrains. This was a great jump from 2002-03, when the foodgrain production was 174.2mn tonnes, and a cause to celebrate.... till one noticed that actually, 02-03 was a bad year due to monsoons and that India had produced 212mn tonnes of foodgrain in 2001-02 as well!!!

    For more such "economic miracles", have a look at:
    A World Deceived By "Numbers/ Facts"
    Governments as "Enrons"
    The Real "Miracle" of Chinese FDI Figures
    FDI: China and India - Just a Difference in Definition!!!


    Raghunandan D H said...

    Frannkly do not what was wrong in what the Govt did in the calculations !!!

    - Why should shifting the base year be such a issue.. there is always criticism in what the govt does irrespective of whether its right or wrong .. if they had not chnged it for another decade then probably people would say we have a outdated calculation system. Am I wrong !!

    - Today the services sector is one of the biggest engines of growth. I am not sure whats the Authenticity of the data , but this step may lead to making these sectors organised. People will start paying up taxes and be more accountable for it when they are a part of teh accounting system. There is so much of back lash when multination retailers enter India but the Kirana Wala does not want to pay tax or be a part of the GDP .

    - Again the weightages - Hotels and Restaurants are rampantly increasing providing a deccent employment to the " unpadh " of India , for e.g Rela Estate in Bangalore is one of the best to invest in and hence is a key growth driver, govt is talking about FDI in Infrastructure / Insurance and So on .. considering the prominence that the Govt is giving to these industries and their own growth rate it may be a valid thing to increase their weightage.

    Do we really need to see it as a tactical accounting ?? may be a more in-depth analysis is required before we point fingers at the Govt, let us give them credit for it when they do good !!!

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