What a big GDP growth figure does not reveal of the economy
PremiumWe need to look beyond the 2021-22 number for a clear picture of how the country has fared lately
All’s well on the economic front. Or so the 8.7% real gross domestic product (GDP) growth for 2021-22 seems to say. GDP is a measure of the size of an economy during a particular period. The last time India grew faster than 8.7% was in 1999-00, when Lakshya Sen, India’s latest badminton star was yet to be born and the superstar actor Alia Bhat was six going on seven. The point being it was a while back.
Of course, our 8.7% growth was a statistical aberration primarily because GDP had contracted by 6.6% in 2020-21. So, while talking about annual economic growth of 8.7% is important, what is more important is also mentioning the fact that the size of the economy in 2021-22 was just 1.5% bigger than in 2019-20, the pre-pandemic year.
Nonetheless, such details shouldn’t come in the way of a great story, which is that the Indian economy grew at its fastest in more than two decades. As David Pilling writes in The Growth Delusion: The Wealth and Well-Being of Nations: “In modern times… GDP has become a proxy for a country’s well- being. If the economy is growing, then things must be good. If it is shrinking, then not so much." There is an obsession to look at just the GDP growth figure and draw conclusions from it. The trouble is that the devil, as always, is in the details.
One way of measuring GDP is adding up private consumption expenditure, government expenditure, investment and net exports (minus imports, i.e.). India’s investment to GDP ratio (in nominal terms, not adjusted for inflation) has been falling over the years, having peaked at 35.8% in 2007-08. For the period between 2015-16 to 2019-20, it stagnated between 28% and 29%. It crashed to 26.6% in 2020-21 due to the covid pandemic. In 2021-22 it recovered to 28.6% which is where it was back in 2019-20 as well. A higher investment to GDP ratio signals higher economic activity and job creation.
Investment by households, which is a good measure of small firms operating in the economy, has been falling since 2011-12, when it was at 15.9% of GDP. By 2020-21, it was down to 10.3%. The figure for 2021-22 isn’t yet available, but it can’t be significantly different from the 2020-21 figure.
What this tells us is that informal businesses have been shrinking for a while now and that means fewer jobs available for those entering the workforce. This is visible in the falling labour force participation rate (LFPR), or the proportion of our population aged 15 and above that is economically active. Data from the World Bank suggests that India’s LFPR was 53% in 2011 and fell to 46% in 2021. This primarily implies that more and more individuals who enter the workforce cannot find jobs and in the process stop looking for one.
Of course, we miss these details if we choose to look just at just the overall GDP growth number. Over and above this, the post-covid and post Ukraine-war economy that is emerging seems to be K-shaped: parts of it are doing well and moving upwards while other parts move downwards.
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Take the case of companies listed on the stock market. Data from the Centre for Monitoring Indian Economy shows that net profit for the 30 companies that make up the BSE Sensex, India’s most popular stock market index, went up by 40.1% in 2021-22. Their operating margin (profit before tax as a percentage of total income) stood at 19.5%, the highest since 2007-08. Companies that constitute the Nifty 50 index have shown an even better performance. India Inc’s listed companies haven’t had it so good in many years.
Now contrast this with workers demanding work under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a backstop for rural residents in need of pay. The number of households demanding work in 2021-22 was around 8.5% lower than in 2020-21, when the economy contracted. Nonetheless, it was 34.4% more than the work demanded in the pre-pandemic year of 2019-20.
In fact, the number of households demanding work in April-May 2022 was 2.4% more than in April-May 2021. Given that the scheme is self-selecting, i.e., only those who want to do manual unskilled work volunteer for it, this tells us that our rural economy is still in trouble. Of course, the overall GDP growth number doesn’t reveal this.
Finally, while this is boom time for skilled employees working in the IT sector, those in the informal economy are struggling. Too many earn too little. A recent news report by Press Trust of India pointed out that over 94% of the 276.9 million informal workers registered on the labour and employment ministry’s e-shram portal earn up to ₹10,000 a month. This means nearly 260 million individuals earn less than ₹1.2 lakh a year, which is significantly lower than India’s per capita income (or the average income of an Indian) of ₹172,913 in 2021-22.
To conclude, as Pilling puts it: “Our economic mirror is broken." Clearly, all is not well and there is a need to look in-depth as well as beyond the GDP data while trying to figure out which way our economy is going. The trouble is that many individuals and organizations in the business of economic narratives aren’t doing that. Are they being ideological or opportunistic (or both)? Your guess is as good as mine.
Vivek Kaul is the author of ‘Bad Money’.