Indian GDP – the tool in a political game

In November 2018 information on recalculated GDP in India was published. GDP recalculation is well known process in the world’s economic history however in India it happened for the second time during the last 4 years. This is exactly the time under the rule of Prime Minister Narendra Modi and his BJP party (Bharatiya Janata Party). The valid point in the discussion is what GDP brings to people’s lives and whether its recalculation changes should be taken into consideration at all, and most of all, whether GDP may be used as a weapon in a political game.

Economic development indexes allow to compare all existing processes in economies of cities, countries and even countries associations. GDP is the most common indicator of economic development when it comes to the analysis of socio-economic situation. Nowadays in a world of globalisation and capitalism GDP has become an indicator of country’s wealth and this is the most common way of GDP analysis. Economics of ’50 and ’60 XXth century had been focused on issues referring to economic growth, it’s maximization and maintenance. Taking into account this approach it is easy to state that economic development has been perceived in terms of quantitative categories. There has been a dichotomy between quantitative and qualitative data observed which does not support a sustainable development of one country. According to the definition economic development does not consist only of economic growth but also society’s satisfaction, also the same GDP data may be interpreted in various ways.

GDP has been the most common publicly known index of measurement economic activities performed on a territory of one country. The index is based on System of National Accounts ­– SNA which has been published for the first time by United Nations in 1952. It is a summary of rules on how the society’s labour effectiveness should be measured of which the labour usage should be measured on a market. The labour usage is being verified in exchange transaction in money. The SNA system is based therefore on a statement that each work that is valuable for society creates a society’s welfare. Hence the most common SNA indicator is GDP. There are three basic definitions of GDP. The first one states GDP is a net sum of final sale on a geographical territory; according to the second definition GDP is a sum of added value on a particular geographical area which value pays the final consumer; while the third says that value added sum is a source of earnings of production factors used by an enterprise.

In the light of the third definition GDP is an index of incomes therefore it is important to value the level of welfare. Despite the fact GDP is worldwide known and used economic development index it has significant disadvantages. The construction of GDP does not include some goods and services and does include ones which do not participate in the growth of society’s welfare. The most common disadvantage is GDP does register transactions only. That means it does not include any human activity which does not provide them any money but brings them other benefits. The second disadvantage of GDP is data gap, especially not registered data coming from half legal or illegal businesses while the third disadvantage is that value of goods sold does not cover measures in selling process. It means that having sold two goods one of which has been discounted, both bring the same advantages while it is not reported in GDP register. GDP is not the index of happiness measures even though it measures the usage increase as a pleasure for a consumer, it does not measures the value of free time, environment pollutions but covers the production of anti-goods which have a bad impact on environment and the production of weapon: aircraft, tanks or rocket launchers. GDP does not reflect benefits of accumulated wealth by any country which may be houses, assets, national treasures, pieces of art in a museum or a gallery. The last disadvantage of this economic indicator is that GDP is reflected in domestic currencies hence to compare two economies the local currencies need to be recalculated into common currency. This activity often creates a big differences in GDP estimations.

The change in India’s GDP performed in 2015 covered the value that consumers get to enjoy and not the value producers are consuming. Following the new methodology India has moved to the right direction. The Indian statistics ministry reports the economy grew by 6,9% using the new methodology while using previous one it was only 4,7% in 2014. The change derived from shift to a market-price calculation of GDP as well as from updating the base year used for market trends. The revised methodology incorporates as well comprehensive data on corporate activity and newer household spending and informal businesses

When it comes to the first GDP recalculation performed in 2015 it has been more aligned to global practices measuring the indicator by market prices instead of factor costs, to take into consideration gross value addition in goods and services and indirect taxes. GDP measured in times of INC party (Indian National Congress) and Nehru as well as under other India PMs focused, as in socialist economies, on production of goods and services and other things what they considered to be measured in the economy. The shift has been made to the right direction aiming to put an economy in the first place enabling society to live the better life, measuring consumption opportunities, not the consumer resources provided.

The second GDP methodology change was introduced in November 2018, less than six months before national elections. The outcome of the change is clearly visible, statistics before 2014 have been downgraded while the ones of times of Prime Minister Narendra Modi look better. Such an accusation has been expressed by members of INC and other opposition parties. The Central Statistics Office in India claims the numbers are not politically motivated but the recalculation follows latest global methodology changes.

Comparing both GDP measurement recalculations, the first in 2015 covered change to base and components of GDP calculated back only three years, the second revision from 2018 recalculated data back to 1994. As there have been no significant indicators implying to the second methodology change the BJP’s political opponents use figures released in August that showed stronger growth under the previous government led by INC, to show the change is politically motivated. The first revision presented the India economy expanding 7,7% annually during last five years under Congress and 7,35% since Modi took over in 2014. The revised revision presents now the growth under INC of 6,37% a year.

What should the flip-flopping in GDP calculation methodology expose to Indians and international observers? As the first GDP recalculation is perceived as a move in the right direction and following the global economic approaches, the second recalculation brings a lot of doubts. First of all constant GDP recalculations cast a shadow on the credibility of India’s economy numbers, Central Statistics Office and governments officials. Secondly, it implies GDP changes are clearly driven by political manipulation.

Narendra Modi and BJP came to power promising to bring better times for India, Asia’s third-largest economy, putting GDP as the most important measure of his success. Following the paper of Milan Vaishnav from 2015, “every increase of 1 percentage point in GDP growth improves an incumbent party’s chance of winning a state election by 8%”. Hence the indicator recalculations bring accusations that Modi’s administration is manipulating to better its re-election chances. BJP in New Delhi is also being accused of putting pressure on the Reserve Bank of India to implement policies stimulating growth in Indian economy. As the outcome the bank has focused on inflation and banking sector bad-debts problem more than on priming the pump.

Many of the opposition parties have challenged Modi’s economic record during recent elections and so this will be a point in the discussion for upcoming national elections. However the real power sits with Indian citizens. GDP being purely macroeconomic indicator does not reflect neither satisfaction, happiness nor sustainable development of Indian society hence revision of revised GDP may not be sufficient tool in winning the Indian political game.