GDP figures – time to rethink

Reported by: |Updated: August 19, 2019

With elections behind us and single majority rather than coalition government, everyone naturally is looking and hoping for an economic revival. Here are some samples of the unpleasant news. Car sales are falling. Car dealerships are shutting down. Jobs are being lost among car dealers and auto parts manufacturers. Property sales are stalled. Tax collections are below expectations. Credit disbursements are slowing down. Credit demand is low. NBFCs are facing liquidity issues. And so on.

What is also well known is that India has started its journey of digital transformation. So, many things are becoming paperless. Overall, most of us would agree that the digital economy is much more efficient, and hence produces a smaller GDP for a similar amount of consumption.

The fault is not in the digital economy, but the ways we measure GDP. Many services that are not transacted in money terms are excluded from production and consumption. Here are some examples. If I plant a million trees, the growth of the GDP due to the growth of trees is not included. It is measured only when I cut the trees and sell the wood. Likewise, if I cook for myself, my labor is not included. If I study on my own some free course, I don’t pay any tuition fee and hence it does not reflect in GDP. If I do yoga at home rather than join a gym, GDP is affected. If I use free wi-fi at a railway station, GDP calculation ignores that. If I do a survey for an upcoming policy change, I get paid. If I hold protests for the same policy objective, I don’t get paid. Sometimes it is the latter that is more effective.

Clearly, value creation is happening that traditional GDP computation does not include. That is one good reason why banks, NBFCs and other lenders are now turning to non-financial data to correctly appraise the loan repayment ability of borrowers who do not fit traditional economic paradigms.

Systematically measured metrics for the digital economy are hard to come by and I see two reasons for this. One is that the new economy players are so diverse and distributed that they do not fall into well-established categories of measurement. We have meaningful data on sales of cars, refrigerators, phones, cement, home loans, etc, but not for food delivery, online education, home tutoring, free lancing, etc. Likewise, the data for formal employment is much better than the data for self-employment. So, one has to rely on judgment along with solid data.

GDP computation, income computation and many other sorts of economic computations are now ripe for a relook to reflect the digital ecosystem and the changing dynamics. Ultimately, what we measure must explain not only the quantity of life but also the quality of life.

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