Recently, new data was released about the GDP of the country. According to it, the annual GDP Growth Rate of the country in the last Financial Year, in the Financial Year of 2020-2021, has touched -7.3%. Since the independence of the country, there has never been such a terrible annual GDP Growth Rate in the country. It was the worst GDP Growth Rate in the history of our country. Why did it happen? What were the reasons and failures of the Government behind it? I mean, the problem with using GDP as a measurement. -7.3%, this number, what does it tell us about the situation of the country? And what does it hide? Come let’s find out in this post.
Latest Data of India’s GDP
Let’s look into the details of this new data first. Ever since the Independence of the country, till today, The annual GDP Growth Rate was negative five times only. Only two of them were during major times. First in 1965-66, when the country’s GDP fell down to -2.6%. The reason for it was that we were at war with Pakistan. And because of the war, the economic situation of the country was terrible. And second in 1979-80, when the GDP had fallen to -5.2%. There were two main reasons for it. First, there was a drought in the country because of Agriculture Production.
Second, there was a revolution in Iran because of which the petroleum supply to the country was quite disrupted. An event worse than these two events was during the Covid-19 pandemic when the country’s GDP Growth Ratehas reached -7.3%. Obviously, India isn’t the only country to be facing this. There are 166 countries around the world where the GDP Growth Rate has become negative because of the pandemic. But there are also the 28 countries whose GDP Growth Rate remained positive, despite the raging pandemic. These include countries like China, Taiwan, Bangladesh, and Vietnam. The government would like to shift the blame wholly on the pandemic.
But we know that even before the pandemic, the GDP Growth Rate of the country has been constantly falling after 2016-2017. But the good news is that the GDP Growth Rate of the last Quaterwas positive. +1.6%. And the RBI expected that the GDP Growth Rate of the Financial Year would be -7.5%, But it was only -7.3%. So that’s good news too. And for the next year, it is being expected that if there is no destructive third wave in the country, things remaining as predicted, the outlook of the future looks positive. The GDP Growth Rate can be anywhere between +7% to +9% next year.
Does GDP Reflect Reality?
But the biggest question that I’d like to ask here is this; What does this number mean? Can this GDP figure reflect the burdens of a citizen or the conditions and situations that a common man is going through in the country.? A household survey was done by the CMIE, 2 lakh people were surveyed in it, which showed that the income of 97% of the Indian population is less than the income of the last year. A US-based research center pew Research Center, according to them, as per a survey they conducted, 75 million Indians were pushed into poverty in the year 2020. A year when the majority of the people became poorer, some were pushed into poverty, in the same year, the multibillionaires of the country, became richer. Why did it happen?
First, let’s understand some basics. GDP or the Gross Domestic Product is made up of four main components. Consumption. How much are the citizens consuming in terms of goods and services? Second, Business Investment. How much are the businesses investing in the country? Thrid, Government Spending. How much is the Government going to spend? And the fourth is the Net Exports. How much is the country exporting and importing? Exports minus Importsis the Net Exports. These are the four main components that make up the GDP. In the last 1 year, the Private Consumption component was affected the most by the pandemic. People lost their jobs. They became unemployed. Or their salaries reduced. Because of all of these, people didn’t have the money to spend. To buy goods or on various services. Because of the lockdown too, people didn’t have many options to consume goods And so, private consumption fell a lot.
But things like Government Spending depend on the government. If the Government spends more, it will drive up the GDP. From here, you’ll start to see where things went wrong. The things that a citizen is suffering through the conditions that a common man is facing, how is it not reflected in the GDP figure, this is a small example of it. If the government spends a lot of money and the private consumption falls by a lot the GDP will not fall down as much because of the increase in Government Spending. And the Government Spending did increase last year.
P Chidambaram’s Stance
The area on which the government spends matters a lot as well. P. Chidambaram, a former Finance Minister, says that the government should increase its spending. But not on just any project. Not on projects like the Central Vista, which is a one-time infrastructure project where a lot of money will be spent this year, but in the end, there wouldn’t be a healthy output from it. Chidambaram suggests that the government should spend in such areas which will put more money with the people. Direct Benefit Transfers should be adopted by the government. The Government should give more money to the people by various means. They can give benefits to the farmers. Send money to the poor or unemployed people. Once people get money, they will be willing to spend more. This will lead to an increase in the Private Consumption component as well.
Here, I’d like to tell you about another interesting problem with the GDP Indicator. Suppose the government spends money on building a road. And there is some corruption. The government spends excessively on building the road. But the quality of the road is terrible. And the road disintegrates after a month. So the government spends a lot of money in the next month to build the road again. But the road breaks down again after a month. More money is spent on the road. And this cycle continues.
But for the GDP, this is actually a good thing. As compared to a scenario where the government Builds a good road that will last 10 years. In the second case, the GDP Growth Rate will be lower. Because the government spends on it only once. Similarly, there are numerous useless activities in the country and the world at large, that does increase the GDP but in reality, neither are the people benefitted by it nor does the country benefit.
How GDP Ignores Efficiency
A problem related to it is that maximizing GDP does not mean that the happiness of the citizens is maximized. Neither does it mean that the efficiency or convenience is maximized. I’ll explain this with an example. Suppose you buy a cheap airline ticket by researching online yourself, and then you go to the website of the airline and buy it. It’s very efficient. It makes you happy because you have bought the ticket at a low price.
Now, look at its alternative. Had you bought this ticket through a travel agent, the travel agent would’ve gotten his salary, and suppose the travel agent did his research on a paid travel website, the travel website would’ve earned a little too, both these things increase GDP. The more intermediaries involved and the more they are paid, the GDP of the country will increase.
But is this actually the most convenient or gives you the most happiness? Absolutely not! Look at a website like Wikipedia. All the information on it is freely available. GDP is not affected by it. The GDP will remain unaltered if you get any information from Wikipedia. But if you pull up any information from a website where you need to pay, it will help the GDP. The GDP of the country will rise so much more. Does that mean you should do it? Absolutely not.
GDP vs Inequality
The next problem is that the GDP is only an aggregate. In a way, it is a total average for the entire country. It does not tell you about the distribution of wealth in the country. If only the top 10% of the people are very rich in the country they earn the most and control the economy of the country, Their spending can lead to rapidly rising GDP even if 90% of the people are extremely poor and have no money to spend. This inequality can affect the average a lot. And it is likely seen in our country as well. As I’ve told you before. That’s why if you take out the rich people from the equation, and check the GDP for the common people, for the 90% of the people, then that GDP might be way worse than it is now.
Bigger is Better
The next problem is that from the perspective of the GDP, the bigger a thing is, the more money spent on something, the better. But in reality, is it not always so. We have seen several examples of it. The more the financial sector kept on growing and becoming out of control eventually led to a financial crisis. And from the perspective of the environment, it is even worse. Because most of the natural resources are limited.
But to maximize the GDPwe need to keep increasing the consumption More and more consumption by the people is good for the GDP. If there are some Nature Parks and islands where the biodiversity is beautifully preserved. Where we can see mesmerizing nature and wildlife, the GDP of the place will be zero. Because we may not get any economic benefit from that place. Since it is left untouched by humans. Like the North Sentinel Island in the Andamans for example. Or some of the islands in Lakshadweep which are uninhabited. The GDP output of those places is Zero.
But if we go there and chop down all the forest kill all the wildlife and make buildings and luxury resorts on these islands, It will be very good for the GDP. The GDP Growth Rate will rise rapidly. Of that specific area. But will it be actually good for the country? You’d say no, but the GDP will say yes. GDP will say that let’s cut all the forests, it will increase the pollution, there will be more companies because of it, that will make anti-pollution masks for you or oxygen cylinders to keep you protected from pollution.
That company will earn more, you will spend more, and the GDP will grow even further. This means, first, create pollution by deforestation and then sell some other things to deal with the pollution so that the GDP can grow even more. Can you see the problems with GDP Growth Rate? The problems that exist in GDP as an indicator. My purpose for creating this video isn’t to ask you to ignore the GDP data from now.
Some Alternate Approaches
Assuming the GDP data to be absolutely useless and not worth paying attention to. It is not so. Friends, GDP is still a very important indicator. Regardless of the limitations and problems. Because the GDP gives an overall idea of the economy. To judge the economy. It will continue to be an important indicator in the coming years as well. All I’m trying to say is there are some limitations to using GDP as an indicator. Areas where it shouldn’t be used. Things that you can’t conclude from it. And when you see this number, the things that are hidden behind this number.
Like if we were to take an example of the fitness of a human body, Body Mass Index or BMI is an important indicator to judge the health of a person. This calculates the ratio of the height and weight of the person and tells you if your height and weight ratio is healthy or not. If your weight is more or less than the ideal weight for your height. The BMI tells us this and it is very important. Many people use it to judge whether a person is healthy or not. But can this indicator tell us about all the details of the health of a person? How is the blood sugar level of the person? If there is a deficiency of any vitamin or mineral. How are the levels of the hormones? Is the bodyweight mostly fat or muscle? BMI does not tell us these things. And you need to check some more indicators to understand the total health of a person. But the BMI does help in approximating the condition. The GDP is similar to it. The things that the GDP hides to uncover them, we need to examine the other indicators.
Like the Global Hunger Index, Peace Index -How peaceful is the country? Environmental Protection Index -Whether the environment of the country is being protected properly or not. We need to check the Air pollution. To understand the inequalities in the country, we need to focus on the Inequality Indexes. That shows the inequality in the country. To judge the development of a common man in the country, the Human Development Index (HDI)should be seen. Apart from these, the Genuine Progress Indicator is a very good measurement that considers the sociological and ecological factors.