Need to relook at method of calculating GDP growth: Rajan

MUMBAI (TIP): Reserve Bank of India (RBI) governor Raghuram Rajan on Thursday revived the debate on the method of calculating gross domestic product (GDP), saying there are problems as it only talks about growth and leaves out a wider context.

“On the point about GDP, there are also problems with the way we count GDP… Sometimes we get growth when people move to a different area but we have to ensure that when people move, they do something that is value adding (to the economy)… We do lose some, we gain some and what is the net, let us be careful about how we count that,” Rajan said while addressing students at the 13th convocation ceremony of the Indira Gandhi Institute of Development Research.

Rajan illustrated his point by saying that if two mothers were to take care of each other’s children and pay each other for that work, there would be some growth in GDP due to the sum of their earnings. However, this growth would not add anything to the economy.

The new methodology of calculating GDP, which was launched in January last year, relies on linking economic activity to market prices instead of the earlier method of basing it on the cost of production. While the new method is reflective of the trend used in most countries, the shift in calculation fuelled criticism as it showed a sharper economic recovery last year; the old method would have indicated stagnation.

Rajan highlighted the importance of examining whether GDP growth reflects jobs in the economy. “Let’s be careful how we count and how we improve our accounting of GDP, which is something we have to think about as we go forward. “A good job is the best form of inclusion but also difficult to create conditions for jobs. Of course we need infrastructure, roads, marketing of small business products…,” the RBI governor said, adding, across the world, governments are looking for new models because the effects of technology and globalisation have an impact on employment. Economies should also move subsidies away from capital and towards subsidising labour. “Trying to incentivise employment of labour, especially employment which will add skills to labour, is extremely important,” Rajan said. Pranab Bardhan, professor of graduate school at the department of economics, University of California, Berkeley, who was the guest of honour at the ceremony, said 30% of India’s youth is neither in the workforce nor in education, the largest in top 10-15 economies. This means that these young people are not immediately employable, which is one of the biggest hurdles in percolation of economic growth to the entire population, Bardhan said.

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