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 2020-21, 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. In this article, we will talk about the problem with GDP as a measurement.
Let’s start it with from where it started
Now the biggest question here is why did the Economy reach such a state? What are the reasons behind this? Come Let’s Examine them One by One.
- Reason 1: Demonetization – Demonetization was the point from where the economic growth started to slide, Afresh report has revealed that corporate investment fell by 60% after demonetization. This is a huge number and finally, people are talking about the falling investments.
- Reason 2: GST Implementation – Theoretically, GST is a great thing because it simplifies the Tax System. But the way in which it was implemented in our Country, It was done in a very complex and Complicated manner, It was very difficult for a common man and the companies to understand it, which lead to huge loses.
- Reason 3: Budget 2019 – which was brought in a spectacular red coloured packet. The budget did not appeal to the investors and stock markets worldwide. The stock market crashed terribly after it. And out of the money invested in India, 22.5 Billion rupees was pulled out by foreign investors ever since the day the budget has been announced.
- Reason 4: Unemployment – The conditions are the worst in the past 45 years. The people who do not have jobs and the people that do have jobs are not getting increments. For Example- The Rural wage growth, that is, the Salaries of the people living in Villages. IN the Financial year 2014, it was growing by 14.6% and now, in the Financial year 2019, it has slid down to a mere 1.1%
- Reason 5: Seizing the Independence of Institutions and Public Sector Companies – There have been attempts to try and install Government Sycophants in every institution that do not have any qualifications due to which, the public sector companies have been enduring losses.
- Reason 6: Scams and Frauds in the Banks – In 2018-19, there has been an increase of 74% in bank frauds in comparison with the last year. This is stated by the RBI Reports, Bank fraud worth 71000 crore rupees took place in the past one year between 2014 and 2017, the Government has written off the loans worth Rs 2.4 lakh crore in public sector banks.
- Reason 7: Lack of Intellectual and Learned people in the Government – But this hasn’t the case always. Gradually, all the learned people resigned For Example- First, Raghuram Rajan Ji, In August 2017, The VC of NITI Aayog resigned. In June 2018 Chief Economic Advisor Arvind Subramianum resigned, In December 2018, RBI Governor Urjit Patel resigned, In June 2019, RBI Deputy Governor, Viral Acharya resigned, In January 2019, an Independent Member of the National statistical commission resigned. One after the other all the learned people and economists kept quitting the Government. Now, the government only has specimens and Sycophants left.
Now Let’s talk about the problems of GDP
The problem of GDP means, the problem with using GDP as a measurement, Let’s look into the details of this new data first.
Ever since the independence of the country, till today, the annual GDP Growth 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 those two events was during the COVID-19 pandemic when the country’s GDP Growth rate has 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.
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 of the Last Quarter was 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 is 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 +7.1% to +9% next year.
What does this GDP number mean?
Can this GDP figure reflect the burden of a Citizens? Or the situation that a common man is going through in the country?
A Household survey was done by the CMIE (centre for monitoring Indian Economy), 2 lakh people were surveyed in it, which showed that the income of 92% of the Indian population is less than the income of the last year. A US-based research centre PEW Research centre, 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 multi-billionaires of the country become 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 business investing in the country? Third, Government Spending– How much is the Government going to spend? Export minus Import is the Net Export
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 salary reduced Because have all of these people didn’t have money to spend, to buy goods or services. Because of the Lockdown to people didn’t have many options to consume goods and so private consumption felt a lot. But things like Government spending depends 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 it not reflected in the GDP figure, this is a small example of it. If the Government spend 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. The area on which the government spends matters a lot as well.
P. Chidambaram, former Finance minister, says that the government should increase its spending, but not on just any project 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 would not 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 Transfer (DBT) should be adopted by the government, the government should give more money by various means. They can give benefits to the farmers, send money to the poor or unemployed people. Once people got the money they will be willing to spend more, this will lead to an increase in the private consumption component as well.
Interesting Problem Relating Problem with GDP Indicator
Suppose the government spends money on building a road. And here is some corruption, The government spends excessively on building the roads. But the quality of the road is terrible. And 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 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 spend 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 benefited. A problem related to it is that maximizing GDP does not mean that the happiness of the citizen is maximized. 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 have bought this ticket at a low price. Now, look at its alternative. Had you brought 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.
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 the 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. 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.
The Next Problem is that from the perspective of the GDP, the bigger thing is, the more money spent on something, the better. But in reality, it is 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 GDP we need to keep increasing the consumption more and more by the people is good for the GDP. If there are some nature parks and islands where the biodiversity I 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 the place. Since it is left untouched by Humans like the North Sentinal Island in the Andaman for example or some of the islands in Lakshadweep which is uninhabited. The GDP output of those places is zero. But if we go there and chop down all the forest and kill all the wildlife and make buildings and luxury resorts on those islands It will be very good for the GDP, The GDP Growth rate will rise rapidly in that specific area, But will it be actually good for the country? You’d say NO, But GDP says 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 GDP will grow even further. This means, first, create pollution by Deforestation and then sell some things to deal with 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.
So Do GDP Matters or Not?
This article doesn’t mean to ignore GDP data from now, assuming the GDP data to be absolutely useless and not paying attention to, It is not so. GDP is still a very important indicator. Regardless of the Limitation and Problems Because the GDP gives an overall idea of the economy. To judge the economy will continue to be an important indicator in the coming years as well. Yes, there is some limitation of using GDP as an indicator area where it should not be used things that you cannot conclude from it. And you see these numbers the things that are hidden behind these numbers.
Like if we were to take an example of the Fitness of a Human body, Body Mass Index is the important indicator to judge the health of a person. This calculates the ratio of the height and weight of the person and tell 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 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 the person. But the BMI does help in approximating the Condition.
GDP is an important indicator but GDP isn’t the sole criteria for development so it should be that we compromise on other things and focus only on GDP growth Because Happiness, Human development, Clean air, a clean environment, all these things are vital for development.
Do 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 Air pollution, To understand the inequalities in the country, we need to focus on the inequality indexes, that shows the inequalities 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 that the only GDP does not.Follow/Contact Me on following Social Media