Last week when the new GDP numbers
came out there was the usual flurry on TV news channels. All sorts of people held forth on the growth rate of the economy. But very few of them knew what they were talking about.
That is understandable because the measurement of the rate of growth of the gross domestic product
– which by the way is what GDP stands for – is not just a technical affair, it is also an approximation: 6.3, 5.7, 8.4 or whatever percent growth merely means that the output of everything added together grew at a rate that lies somewhere between the two whole numbers to the left of the decimal point, that's all.
Getting all excited over it is like getting excited over, say, whether the escape velocity of a rocket was 25,000 miles per hour or 25,500 or 26,100, etc. It makes no difference to the common man, and should not. It is enough that the rocket did escape Earth's gravity.
Likewise, for the common man, it is of no relevance what the quarterly GDP growth rate is. A few decimal points this way or that doesn't affect 99.9 per cent of the citizenry at all. That's why it should not be a matter of discussion or debate on TV, not least by people untutored in the intricacies of data analysis.
Yet, every three months, it is, reducing statistical complexity to the level and texture of a discussion on, say, the film Padmavati. Absolutely no one emerges any the wiser from these discussions.
Even cartoons provide better value.
GDP as body temperature
Let me explain. The obsession with GDP growth rates started after 1945. For the first forty or so years, it was intellectual one-upmanship between the US and the USSR, with each trying to show that its system was better.
Then from the mid-1980s onwards, it became clear that the USSR's system was useless. Simultaneously American attention shifted to the bond markets, which were awash with funds and needed something to hang their coats on.
So the GDP growth rate became the so-called 'target variable'. If it was high and accelerating the bond markets did well, which meant interest rates were low. The opposite was also true.
In the 1990s, along came the Chinese economy and its investment attracting policies. US capital flowed to China and that became a reason for constantly measuring the GDP growth of China, which merrily overstated it to keep foreign investment coming.
By the end of the 1990s, as private capital flows ballooned, the GDP growth rate had become what the body temperature is to doctors and patients: a single point reference to get a rough approximation of something extremely complex.
It becomes clear just how complex it is when one sees that the GDP growth rate can be doubled without any increase in output merely by simply doubling the rate of taxes when it is measured at market prices.
Reason: GDP at market prices includes the income of the government, ie tax revenue minus subsidies. The more rapidly net revenue grows, the faster GDP will grow.
There is another googly. If you go into a restaurant and pay an entry tax of Rs 100 levied by the government but come away without eating anything – which means no service has been produced – the government has collected Rs 100 for nothing. Next year, if it increases the tax to Rs 110 and the same thing happens – you come away without eating – the economy would have grown at 10 per cent without producing anything at all!
Finally, GDP growth rate also measures the difference between the cost of inputs and the price of the output. If Rs 100 is spent on inputs and the output is sold at Rs 100.10, GDP growth rate goes up. The opposite is also true.
Which leads to a paradox: if global prices start rising, say of oil, India's GDP growth rate will come down!
Unless the common man can get his head around these puzzles, there is no point at all in discussing GDP growth rates on prime time TV news. Nor indeed in governments puffing out of their chests or the Opposition punching them on it.