RBI Governor Raghuram Rajan sceptical about GDP calculation

[Dungeness]

RBI Governor Raghuram Rajan sceptical about GDP calculation

By: ENS Economic Bureau | Mumbai | Published:January 29, 2016 1:16 am

RBI governor Raghuram Rajan. (Express Photo by Prashant Nadkar)
Reserve Bank Governor Raghuram Rajan on Thursday raised a question mark over the way gross domestic product (GDP) is calculated in the country stating that “we get growth because people (are) moving into different areas”.

Value addition to the GDP is important when people move into newer areas of work rather than just a rise in the growth numbers, Rajan said while asserting the need to be careful in counting GDP numbers. Industry experts and economists had in the past expressed skepticism over the calculation of GDP numbers according to the new methodology.


“So, in that sense we have to be a little careful about how we count GDP because some time we get growth because people (are) moving into different areas. It is important that when they move into different areas they are actually doing something which is more value added,” Rajan said.

Speaking at the 13th convocation ceremony of the Indira Gandhi Institute of Development Research in Mumbai, the RBI Governor gave an example of two neighbouring mothers who babysit each other’s child and get paid an equal salary. He said both the mothers getting paid a salary will be an addition to the GDP but may not be an exact reflection of an economic growth.

“If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off,” Rajan observed.

According to the government’s mid-year economic review, the economy is now expected to grow at 7-7.5 per cent in the fiscal year ending March 2016, down from an estimate of 8.1-8.5 per cent announced in the Budget in February. In January 2015, the government led by Prime Minister Narendra Modi changed the base year for computing national accounts which pushed up the economic growth rate for 2013-14 to 6.9 per cent, while earlier estimate on the basis of old series was 4.7 per cent. These changes follow a revision in the base for calculating national accounts to 2011-12 from 2004-05.

Pranab Bardhan, a professor at the University of California, Berkeley, who was the guest of honour at the event raised the point on the possibility of restructuring the current system of capital subsidies to wage subsidies through which the business sector could be actively involved in worker training programmes as well as identifying good workers. Supporting the issue, Rajan stated there is a need for incentivising employment rather than providing subisidies on capital. “Apart from direct tax benefits for investment, we also give subvention on loans in many situations which subsidises capital. We may not do similar things for labour. Clearly, trying to incentivise the employment which will add skills to labour is extremely important,” Rajan added.

http://indianexpress.com/article/in...ghuram-rajan-sceptical-about-gdp-calculation/

@Chinese-Dragon @Nilgiri @RiazHaq

 

[Nilgiri]

As long as we are comparing on the international level, IMF SNA has to be used for greatest compliance. Or on the other hand IMF should get every other country to go back to the GDP volume method. If a new composite measure that seeks to address "real social" growth can be made, let it be so....but again it needs to be done internationally.

Internally, people can tout the pros and cons of each system. Measuring an economy brings sufficient "scepticism" however you do it.

 

[dadeechi]

“So, in that sense we have to be a little careful about how we count GDP because some time we get growth because people (are) moving into different areas. It is important that when they move into different areas they are actually doing something which is more value added,” Rajan said.

Speaking at the 13th convocation ceremony of the Indira Gandhi Institute of Development Research in Mumbai, the RBI Governor gave an example of two neighbouring mothers who babysit each other’s child and get paid an equal salary. He said both the mothers getting paid a salary will be an addition to the GDP but may not be an exact reflection of an economic growth.

“If mother A went to look after the children of mother B and mother B went to look after the children of mother A, and they each paid each other an equal amount, GDP would go up by the sum of the two salaries. But would the economy be better off? Presumably, kids want their own mother rather than the neighbouring mother. And the economy would be worse off,” Rajan observed.

Both GDP of a country and Credit score of an Individual are useless numbers.

They have value only because of powerful cartels supporting such scheme.

How does he know the kids are better off with their own mothers?

I would say the kids may do their homework on time if they are babysit by their neighbor's mother rather than their own.

 

[Dungeness]

As long as we are comparing on the international level, IMF SNA has to be used for greatest compliance. Or on the other hand IMF should get every other country to go back to the GDP volume method. If a new composite measure that seeks to address "real social" growth can be made, let it be so....but again it needs to be done internationally.

Internally, people can tout the pros and cons of each system. Measuring an economy brings sufficient "scepticism" however you do it.

This news is all over the place today. What he said is quite different from what Indian Financial Minister believed. It just renews the controversy among international economists about this revised GDP methodology. It will take a few quarters to let the dust settle.

 

[Nilgiri]

international economists about this revised GDP methodology

They can all take it up with the IMF then.

China and many others follow SNA 2008 as well...if IMF wants to make a more "socially appropriate" measure... that is their call. But many countries will have to then change their data to be able to compare and rank to each other under any unit of currency.

The specific issue Mr. Rajan is bringing up here is a theoretical problem in the old method too, and in fact any method of measuring GDP. But to capture such nuances means you will have to micromanage the data acquisition to such a level it may be overall a negative thing since other pieces of information will be lost depending on various definitions (similar to what @dadeechi is talking about).

In effect any way you choose is a compromise regarding various things....but its important I think for the world to at least pick one conceptual way for every country and stick with it...and then work out the specific improvements with time.

It will take a few quarters to let the dust settle.

More than that I think. Couple quarters would be actually quite good if it happens. IMF is already working alongside India to better capture India's GDP more accurately under the SNA 2008 (and what they learn will apply globally to many developing countries especially)....but fully precise numbers under the SNA 2008 system may need a couple years. There may also be revisions for what has happened already according to these improvements...and they can go either way (add or subtract)...its hard to say right now.

 

[Dungeness]

They can all take it up with the IMF then.

China and many others follow SNA 2008 as well...if IMF wants to make a more "socially appropriate" measure... that is their call. But many countries will have to then change their data to be able to compare and rank to each other under any unit of currency.

The specific issue Mr. Rajan is bringing up here is a theoretical problem in the old method too, and in fact any method of measuring GDP. But to capture such nuances means you will have to micromanage the data acquisition to such a level it may be overall a negative thing since other pieces of information will be lost depending on various definitions (similar to what @dadeechi is talking about).

In effect any way you choose is a compromise regarding various things....but its important I think for the world to at least pick one conceptual way for every country and stick with it...and then work out the specific improvements with time.



More than that I think. Couple quarters would be actually quite good if it happens. IMF is already working alongside India to better capture India's GDP more accurately under the SNA 2008 (and what they learn will apply globally to many developing countries especially)....but fully precise numbers under the SNA 2008 system may need a couple years. There may also be revisions for what has happened already according to these improvements...and they can go either way (add or subtract)...its hard to say right now.

China is still using SNA 1993 as far as I know, and it was believed it would add additional $1T to its GDP if it converts to SNA 2008. http://atimes.com/2015/09/chinas-economy-might-be-bigger-than-previously-thought/

I think the point people are debating is not about which system is being used, rather, the contradictions between the official GDP growth data and other economical indices.



@Martian2

 

[Nilgiri]

From what I gather, China uses a hybrid system between 1993 and 2008 SNA:

http://www.ft.com/intl/cms/s/0/b569efb6-8736-11e4-8a51-00144feabdc0.html#axzz3ybF2jYJi

http://blogs.piie.com/china/?p=4080

In the interview, Xu did not mention when exactly China would transition to the new system of accounting. However, reading two most recent GDP reports, the footnotes indicate that they are “currently transitioning” (1H 2014 report), as opposed to “under consideration” in the 2H 2013 report, indicating this process is underway.

i.e they have not fully went for the SNA 2008 system yet...but only in parts.

What is somewhat confusing is the April IMF WEO release says its data for China is under the SNA 2008 methodology:

https://www.imf.org/external/pubs/ft/weo/2015/01/weodata/co.pdf

I guess India's will count under same standard only from 2016 onwards.

I think the point people are debating is not about which system is being used, rather, the contradictions between the official GDP growth data and other economical indices.

There is data both for and against the growth data, its not a black and white picture either way.

When changing from system to another, there will be a transition period of "lag" in what the growth feels like on the ground....especially certain indices that were more influential in the older system have reduced weightage and/or impact in the new system.

For example everyone was quoting the industrial confidence index (PMI) decreasing as saying that the growth is clearly wrong etc....but the same month (December if i remember correctly) did nowhere near as badly in terms of actual growth % be it industry or manufacturing....in fact it actually still expanded by some percentage points...so it did not even follow the trend by the PMI which is just a survey/sentiment analysis to begin with.

Given that India attracted around 60 billion USD in FDI in 2015 (almost doubling from last year) and sales of transport, energy, real estate are increasing strongly and sectors like mining, construction, railways are on the upswing...it is only a matter of time before even more numbers follow the improvement trend (as much as possible given the global economic scenario).

This year and 2017 will be the years I think we will be able to confirm if India is getting back to and even surpassing its growth during the 2003 - 2008 period....I feel 2014 and 2015 were the "bottoming out". But lets see.

 

[punit]

Both GDP of a country and Credit score of an Individual are useless numbers.

They have value only because of powerful cartels supporting such scheme.

How does he know the kids are better off with their own mothers?

I would say the kids may do their homework on time if they are babysit by their neighbor's mother rather than their own.

so u mean to say kids are better when they dont have mother ?

 

[srshkmr]

THis Guy deserves a Finance Ministry Post

 

[dadeechi]

THis Guy deserves a Finance Ministry Post

Not Deserves but Desires

 

[RiazHaq]

It is time we ( #India )stop thumping our chests for being "fastest-growing economy" #Modi #BJP via @firstpost http://www.firstpost.com/business/i...stest-growing-economy-we-are-not-2603172.html …

You can trust Raghuram Rajan, the Reserve Bank Governor, to prick any balloon of excess optimism when required. Even as the idea of India being the fastest-growing major economy in the world gets bandied about carelessly, especially by politicians who would like to claim credit for it, Rajan had this to say yesterday (28 January): "There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth."
Nor does talk of India overtaking China on growth make much sense. At five times India's GDP, our 7 percent economic growth equals under 1.5 percent China's growth in terms of its impact on global growth. China may be reeling under excessive debt and is painfully readjusting its economic engine towards domestic consumption, but India's problems are hardly any less stark. We have a corporate sector staggering under loads of debt, and banks that would be heading towards bankruptcy if they were not government-owned.
The problem with us is that we tend to celebrate success a bit too soon; even if politicians feel the need to claim success even if it was largely due to luck, there is no need for the media to keep claiming that we are the fastest growing economy. India reforms only when it is on the brink of economic disaster - as was the case in 1991 - and trying to pretend that all is hunky-dory is the last thing we need. We continue to be in deep trouble, and even though there is slow improvement in the growth cycle, we are far from being home and dry. And the seven percent growth we have taken for granted for now can be yanked from under us if there is a meltdown in China or another 2008.
India's misfortune is that we shifted to a new way of measuring GDP - gross value added - just when the government changed. So we have new data from the ministry of corporate affairs' five lakh company database whose validity we have no clue about adding to the confusion, as Rajan pointed out. This has given the NDA government unnecessary bragging rights.
Caculated on the more accepted old GDP methodology, we are probably more at six percent growth than seven percent.
The latest bank results - from ICICI Bank and Axis Bank - show that the rotten loan portfolio has now begun to infect even private sector banks. ICICI Bank reported a near one percent rise in gross non-performing assets in the December quarter, which sends a worrying signal. The bad loans scenario is clearly a bigger problem than we thought earlier.
This means the Modi government has much more work to do before it can claim some degree of success in turning around the economy. The UPA has handed it a poisoned chalice which it has been drinking heartily from, assuming it was amrut. Not quite.
Consider the mess it has inherited in so many sectors, and why cheap oil alone will not help.
First, cheap commodity prices help the government bring down inflation and the subsidy bill, but it also depresses the profits of oil and coal companies, and has roiled the steel sector.
Second, the mess in corporate and bank balance-sheets ensures that there is no stock market nirvana. Loads of public sector equity can't be sold as petroleum and banking stocks are a huge part of the indices and prices are deadbeat.
Third, big bills are coming up on one-rank-one-pension and the Seventh Pay Commission. The only way to pay these bills is to let the fiscal deficit go where it will in 2016-17 and rein it in from the year after.
One hopes the finance minister bited the bullet fully in his next budget.
Fourth, the UPA left the infrastructure and real estate sectors - two of the biggest potential job creators - grinding to a halt. Reviving both will be a herculean task.

 

[Dungeness]

It is time we ( #India )stop thumping our chests for being "fastest-growing economy" #Modi #BJP via @firstpost http://www.firstpost.com/business/i...stest-growing-economy-we-are-not-2603172.html …


The problem with us is that we tend to celebrate success a bit too soon; even if politicians feel the need to claim success even if it was largely due to luck, there is no need for the media to keep claiming that we are the fastest growing economy. India reforms only when it is on the brink of economic disaster - as was the case in 1991 - and trying to pretend that all is hunky-dory is the last thing we need. We continue to be in deep trouble, and even though there is slow improvement in the growth cycle, we are far from being home and dry. And the seven percent growth we have taken for granted for now can be yanked from under us if there is a meltdown in China or another 2008.
India's misfortune is that we shifted to a new way of measuring GDP - gross value added - just when the government changed. So we have new data from the ministry of corporate affairs' five lakh company database whose validity we have no clue about adding to the confusion, as Rajan pointed out. This has given the NDA government unnecessary bragging rights.
Caculated on the more accepted old GDP methodology, we are probably more at six percent growth than seven percent.
The latest bank results - from ICICI Bank and Axis Bank - show that the rotten loan portfolio has now begun to infect even private sector banks. ICICI Bank reported a near one percent rise in gross non-performing assets in the December quarter, which sends a worrying signal. The bad loans scenario is clearly a bigger problem than we thought earlier.
This means the Modi government has much more work to do before it can claim some degree of success in turning around the economy. The UPA has handed it a poisoned chalice which it has been drinking heartily from, assuming it was amrut. Not quite.
Consider the mess it has inherited in so many sectors, and why cheap oil alone will not help.
First, cheap commodity prices help the government bring down inflation and the subsidy bill, but it also depresses the profits of oil and coal companies, and has roiled the steel sector.
Second, the mess in corporate and bank balance-sheets ensures that there is no stock market nirvana. Loads of public sector equity can't be sold as petroleum and banking stocks are a huge part of the indices and prices are deadbeat.
Third, big bills are coming up on one-rank-one-pension and the Seventh Pay Commission. The only way to pay these bills is to let the fiscal deficit go where it will in 2016-17 and rein it in from the year after.
One hopes the finance minister bited the bullet fully in his next budget.
Fourth, the UPA left the infrastructure and real estate sectors - two of the biggest potential job creators - grinding to a halt. Reviving both will be a herculean task.

Modi administration is quick to claim the credit, and Indians are quick to celebrate. So far we don't know this new found title of "the fastest growing economy" is due to significant improvement on fundamentals or merely due to the methodology change. As far as we know, none of the all important reform packages has been passed, the industrial output did not show any growth, and the export is down substantially.

Anyway, RBI chief's comment may be needed to put things to perspective in this Modi frenzy. I don't think Indians should blame the Congress on each and every Indian underachieves, and think Modi will be that golden finger. The true growth should be gauged not on the gains of riches but on the progress of the poorest segments of the society, unfortunately, they don't really have any voice on internet.

 

[Nilgiri]

So far we don't know this new found title of "the fastest growing economy" is due to significant improvement on fundamentals or merely due to the methodology change.

Define fundamentals? Energy? Transport? Infrastructure? Rural growth? MSMEs?

All of these are already growing substantially under specific reforms and leadership of the new govt. and will accelerate this year.

They are much more supply side focused. Hence why growth has increased and inflation has decreased overall. They actively solve the bottlenecks rather than just create program after program and more red tape...and then hope to god changing the interest rate will fix it somehow or there will be a lifeline thrown externally somehow (like the previous govt.)

Thats why interest rates today are purely being talked about in terms of industrial revival through loans and financial margins for the main conglomerates and even MSMEs....rather than just a black and white panacea that is some weird fetish of a tradeoff between growth and inflation (the traditional demand side mantra of the Congress).

As far as we know, none of the all important reform packages has been passed

Nowhere near all of them sure. But none? You really want me to post every single reform that has been done?

FDI alone has nearly doubled over the span of a year, mainly due to tax, bankruptcy and other economic reforms concerning ownership, investment norms and bureaucracy.

Much more than the Land Acquisition Bill and GST (which are quite over-rated by the media to begin with)....is the MUDRA and banking coverage schemes which is probably the largest landmark achievement so far since the 1991 reforms.

the industrial output did not show any growth

Now you are just making things up. Not show ANY growth?

http://www.tradingeconomics.com/india/industrial-production

From 2011 to 2014 there was a massive deceleration as you can see. Heck in 2013 - 2014 the growth was actually NEGATIVE (-0.1%) overall for the year.

Thankfully it has bottomed out now. 2014 - 2015 showed about 2.3 % growth overall and this Fiscal year its expected to be around 4.5 - 5% overall and next year will be even better.

You cannot go from negative growth to double digit growth in just one year when we are talking about significant impulse from decelerating over 3 years.

and the export is down substantially.

Volumes are mostly unchanged or even growing. It is in dollar terms where such has come down...especially given that India's basket of exports includes a lot of petroleum products and derivatives of such.

But its completely not a problem for India since the imports have come down a lot more than the exports have...so our margins have actually improved with the commodity and energy deflation. This will seriously help the economic revival through the INR weak exchange rate and low input cost this coming FY once credit leverage improves and more reforms come and investment returns start to operationalise.

You cannot bring up "fundamentals" in other areas and ignore them when it suits you here. Export fundamentals (volume production from sectors that employ many workers) are perfectly stable and growing.

Anyway, RBI chief's comment may be needed to put things to perspective in this Modi frenzy.

The real results from Modi are upcoming. This will be the main watershed year.

RBI chief is a pragmatic person. He has credited Modi administration (if you have watched his interviews) way more than any credit he gave to the previous administration when it comes to things like reforms, govt spending strategy and banking reform in general. He has defended the Modi administration on several issues too, specifically the growth rates and some reforms taking time to come into action.

His criticism of SNA 2008 growth figures 100% applicability to India is not a criticism of the Modi govt. Let us be clear. Both SNA 2008 and GST system are decisions made BEFORE Modi came to power....and SNA 2008 is a foreign compliance (and hence designed) norm to begin with. Any such system you use old or new will bring in various pros and cons.

I don't think Indians should blame the Congress on each and every Indian underachieves, and think Modi will be that golden finger.

Its never black and white situation. But congress made a bad situation worse by a) doing nothing mostly b) continuing the fiscal disease of subsidies over capex spending...and completely rotted away 4+ years of India's growth story (in recent years)....and did not take anywhere near reasonable advantage when things were going good between 2004 - 2009 to push steady 8 - 9% growth to where it should have been (more than 10% and more importantly made more sustainable).

Modi has much to do to stem this rot still. It is not so easy, but his track record is very good and his action so far is very promising. No one serious expects him to be a magician....he himself has never claimed this. He is best at delegating well, reducing bureaucy, streamlining processes and monetizing, sustaining and following up on schemes rather than just announcing them and letting them fall to the wind eventually when the political mileage is used up (as is the traditional way in India). Let us let his results in this year and the rest of the term speak for themselves.

The true growth should be gauged not on the gains of riches but on the progress of the poorest segments of the society, unfortunately, they don't really have any voice on internet.

They are being given a voice more than any other time in the past in India. Modi came from dirt poor background, unlike the traditional elites that have run India so far. There is a huge increasing network of information flowing both ways between govt and people (including poor people) now because of programs like MUDRA...bypassing the traditional middlemen and power structures. It will take a little more time to truly see the achievements and results of this on the scale of country (it has been achieved in a few states already including Modi's Gujarat), since it has just commenced on the national level.

For the poor to improve, the reasonably empowered among them need to be given access to resources efficiently...and there must be a good increase in the middle class too because that is inextricably linked with directly vectoring such resources to the poor sustainably through employment and organically driven spending etc. This is why the long term programs designed and starting to be implemented by this govt are way more important than the other more media prevalent reforms.

It can safely be said this administration has the balance much better than previous ones as far as this goes. They are not focusing only on a certain segment and then throw a few pittances by way of social spending (that only increases dependence and fiscal strain long term).....but rather to use the margins from the successful areas and groups to create empowerment and startup culture in new areas and demographics as well.

So far I give Modi and his team about 6.5/10....but I am relatively quite harsh in scoring since I give Congress about 2/10 at best when most would add a couple points to each.

 

[Nilgiri]

Right on cue:

http://economictimes.indiatimes.com...-says-raghuram-rajan/articleshow/50777228.cms

Never doubted new GDP numbers, says Raghuram Rajan

NEW DELHI: A day after stating that "there are problems with the way we count GDP", RBI Governor Raghuram Rajan today said he has never raised doubts over the GDP numbers and they are broadly correct.

"It was not anything about new GDP numbers or the way GDP is calculated. I think it's broadly correct," Rajan said while delivering the C D Deshmukh Memorial Lecture here.

Observing that there are "no hidden messages" in his lectures, he said: "You do not have to gauge intent. I am direct when I speak".

These comments follow another lecture Rajan gave yesterday in Mumbai before the students of the RBIpromoted Indira Gandhi Institute of Development Research, wherein he had said, "There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth."

In another development, Rajan invoked 'dosa economics' to explain that pensioners are better off in the regime of falling inflation.

Delivering the C D Deshmukh memorial lecture here, he said that a pensioner would be able to buy more number of dosas from lower interest income provided the inflation remained under control.

"...while I sympathise with pensioners, they certainly are better off today than in the past," Rajan said.

Elaborating his point, the RBI chief said, a pensioner would be able to buy less number of dosas if the interest rate as well as the inflation remains high.

However, pensioner's ability to buy dosas would increase with fall in inflation as it would also protect the purchasing power of the principal amount invested in bank deposits or other debt instrument.

Pensioners oppose lowering of interest rates as it directly hit their income.

Rajan has been trying to keep the retail inflation under check despite pressure from the Finance Ministry and the industry to cut interest rate to boost growth.

He will be coming out with the next bimonthly monetary policy on February 2.