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LATEST NEWS UPDATES | Why India's New GDP Math Lacks Credibility -MK Venu

Why India's New GDP Math Lacks Credibility -MK Venu

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published Published on Nov 30, 2018   modified Modified on Nov 30, 2018
-TheWire.in

The new back-series GDP data, released four months before the 2019 general elections, fails several common sense tests.


India’s back-series GDP (gross domestic product) data, released by the NITI Aayog just four months before the 2019 general elections, turn the basic laws of macroeconomics on their head.

Here’s one that is most intriguing. The data show lower GDP growth during the UPA years, which is when the gross investment to GDP ratio was peaking at 38%. And conversely, they show higher GDP figures during the four years of Modi-led NDA-II government, which is when gross investment to GDP ratio was at its lowest at 30.3%.

Economic theory has always held higher investments lead to higher GDP. So how can GDP grow faster when the investment to GDP ratio has fallen?

Technically, the only circumstance in which this can happen is when the economy’s productivity or the ‘Incremental Capital Output Ratio’ (ICOR) improves equally dramatically. Simply put, it means the economy generates a lot more output for the same amount of capital employed. There is no sign of that happening during the NDA-II’s four years in which productivity was in fact negatively impacted by the twin shocks of demonetisation and messy GST implementation. Besides this, much of the NDA-II period has also seen the largest quantum ever of unproductive assets locked up in banks in the form of non-performing assets (NPAs). Banks are not lending because of unresolved bad loans. How can productivity surge in such circumstances?

Says Mahesh Vyas, CEO of the Centre for Monitoring Indian Economy, a reputed private data research firm, “The new GDP back series numbers show India to be a magical economy where when the investment ratio drops sharply, the economy accelerates sharply. During the period (2007-08 to 2010-11) when the investment to GDP ratio was peaking at average 37.4% the average GDP growth was 6.7%. And in the recent four years (2014-15  to 2017-18) when the investment ratio was down to 30.3% the economy was sailing at 7.2%. Is this productivity magic?” There is really no answer to this fundamental questIon.

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TheWire.in, 30 November, 2018, https://thewire.in/political-economy/why-indias-new-gdp-math-lacks-credibility


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