Maha Bharat: Episode 3

What is GDP?

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Say you wanted to understand the state of the Indian economy, where would you begin? First, you’ll have to get a sense of how big it is. Then you’ll also have to find a way to figure out if it is in a good condition or not. This is where a measure like the Gross Domestic Product or the GDP comes in handy.

Looking at the GDP growth rate of a country can give you an indication of whether the economy is healthy or if it is ailing. This is why most news anchors are obsessed with the GDP growth rate every financial quarter.

This episode explains the fundamentals of GDP and also gives you an insight into India’s growth story in the last decade.

Show Notes

All clips and voices used in this podcast are owned by the original creators

We thank wholeheartedly our guest who appeared on this episode:

  • Puja Mehra


Links to clips used in this episode —

Full Transcript of Episode 3

G-D-P. Every three months – there’s a lot of talk about our GDP, yaani, Gross Domestic Product. 

[We hear news clips about GDP]

Right. So, whenever GDP makes the headlines, it sparks discussions about the economy. 

Is India growing fast enough or is it too slow? 

Is our economy thriving or are we actually doomed? 

How much longer before we become a superpower? 

And oh, the most frequently asked question 

Can India overtake China?

[We hear the voice of a news anchor.]

Overall, this GDP creates quite a hungama and everyone seems to lose their minds over it. 

But what is this GDP and why should we care about it? 

Let’s find out.

Let me ask you a question. Say you wanted to understand the state of the Indian economy, where would you begin? First, you’ll have to get a sense of how big or small it is. Then you’ll also have to find a way to figure out if it is in a good condition or not. 

How would you do it?

Once upon a time it was easy to measure the size of a nation’s economy. You looked in the king’s treasury If there was a lot of gold lying around, the economy was probably doing ok. If the gold began to run out, it was a sign that the economy was in trouble.

[We hear the voice of Devdutt Pattnaik talking about the Arthshastra.]

But as time passed and economic activity itself became complex, understanding the state of the economybecame difficult. 

Today, if you look at the Indian economy, there is no treasure chest you can look into. Money is being created and spent through many ways: there are goods produced and sold, cash earned and invested, money that the government is investing in building industries, money earned through goods being exported to other countries and so on.

That’s why something like the GDP becomes necessary. 

GDP is like a magic number that can give you an idea about the size of the economy, and also give you an indication if it is doing well or not. 

How?

GDP is basically the sum-total of all the finished goods and services produced within the country, in a year. 

Desh mein, ek saal ke andar, jo saare cheezen banti hain, aur jo bhi services hain, un sab ki value ko jodke jo sum-total number milta hai, wohi desh ki GDP hai.

This is a large number and it is calculated using a formula.

GDP is calculated as the sum of: all the goods and services that are bought by the people of a country in a year plus all the money invested in companies for expansion plus all the money that the Government is spending so that more industries, companies, agricultural activities can take place/be set up plus the money earned through exports of surplus goods minus the money spent on import of goods. 

Seems like a complex formula? Well, that’s how complex economies actually are.

I also want to add a disclaimer here: GDP is always an estimate. You can never know the actual total number especially for economies that are as big as ours. What you can do is get an estimate that gives you an indication about the state of the economy. In reality, wherever information is available, statistical organisations compile that and where information is not available, they conduct sophisticated surveys to get as much data about the economy as possible.

Now, based on this estimate, how do you figure out whether the economy is doing well or not?

For this, we use what is called the GDP growth rate.

[We hear a news clip about the GDP growth.]

GDP Growth rate is basically the rate at which a country’s GDP is growing from year to year. So for example, if the annual GDP growth rate for 2019 was 6% and then you hear that the annual growth rate of GDP in 2020 is 5%, then that means we are growing at a slower pace than the previous year. 

That’s why you hear news anchors reeling off percentages one after the other. What they’re referring to is this — the GDP growth rate.

If the GDP growth rate is increasing from year to year, it could mean many things: that there is a demand for goods and services produced in the country, and people have the money to spend on them which in turn means they are earning okay which means the employment levels (naukri hai sab ke paas) are okay. 

[We hear the voice of Arnab Goswami]

Arnab Goswami
All is going fantastic on the economic front. India is unstoppable.

Right.

However, if the GDP growth rate is falling from year to year, then it could mean something is not going right.

Perhaps not enough investment, or not enough demand, which means, consumers are not ready to part with their money, which could mean they don’t have enough money to spend, which could in turn mean that they are not earning enough. 

These are just a few ways to interpret the GDP growth rate.

Now you could ask why is it necessary for us to grow at a higher rate every year? That is, even if you’re growing at 5% instead of 6%, why make such a big deal? At least we are growing right?

The logic is that companies, individuals, economies are willing to make investments today if they believe that the demand for their goods will become more and more tomorrow. 

It’s as simple as that. The general idea is that you want to grow at a rate that is better than the previous year.

So, who came up with this concept of GDP? This is a story that begins in the 1930s in the United States of America at the peak of the Great Depression.

[We hear the voice of President Franklin Roosevelt]

President Franklin Roosevelt
So first of all let me assert my firm belief that the only thing we have to fear is fear itself…fade out

“The only thing to fear, is fear itself.” In 1933, US President Franklin D Roosevelt said this to America when trying to boost the spirit (haunsla badhate hue) of Americans.

At that time, Americans were unemployed, ill, homeless and there was even an increase in death. And the US federal government did not know what to do about the situation. You just saw this exact situation because of the Coronavirus again.

Part of the problem was the almost complete lack of data about the economy. For example, to create jobs, the government needed to first know how many were employed; to raise the standard of living, they needed to know what people were earning.

So thanks to an initiative by US Senator Robert La Follette Junior: the US government decided to calculate an estimate of US national income for 1929, 1930 and 1931. The task was assigned to a man called Simon Kuznets. Kuznets was an economist. 

Now, Kuznets had no formula or method to collect all this data. So this meant that he had to invent a method to calculate the total national income of the country. That’s how the idea for GDP was born.

Kuznets began by compiling lists of America’s different sectors such as agriculture, mining and factories, from where data will need to be found. He was given a small team of 3 senior assistants and five statistical clerks. Together they went on a long road trip, visiting factories, mines and farms, interviewing owners and managers and writing down numbers in notebooks. 

Once a notebook was filled, it would be sent to the Dept. of Commerce in Washington to be tabulated.

His plan was to record all economic activity in the country by individuals, companies, and the government in a single number.

Kuznets only laid the foundation for the calculation of the GDP. After his work, there were many debates about what should go into the formula. 

Finally, in 1944, at a big/important conference called the Bretton Woods Conference, a decision was taken to make GDP the main tool for measuring the country’s economy. 

[We hear sounds from the Bretton Woods Monetary Conference.]

The Bretton Woods conference was attended by 44 countries. And it is at this conference where international financial institutions like the World Bank and International Monetary Fund (IMF) were created.

This made GDP a global standard.

What is interesting, is that India also attended the Bretton woods conference even though it was still a British colony. 

From India, it was CD Deshmukh, the governor of the Reserve Bank of India at that time, who travelled to attend the conference. He flew to the US in an American military plane that took off from Karachi.

Right so far, we’ve talked about what GDP is, why it is important and how to understand it. That is, we now know that if the rate at which the GDP is growing is increasing from year to year, we are in good hands. Now let’s understand the different factors that have made India’s GDP growth go up and down. 

I spoke to senior journalist and author Puja Mehra to take us through the story of India’s GDP growth in the last 10-15 years. Puja Mehra is the author of The Lost Decade (2008-18): How India’s Growth Story Devolved into Growth Without a Story. 

Puja Mehra
So GDP growth in India for the last 10 years has seen ups and downs. First there was a global boom and the global economy was doing very well. There was a lot of demand for exports, there was a lot of investment activity taking place and a lot of that exports and investment money found its way into India which led to.. which gave a boost to economic activity in India. A lot of new projects were put up, a lot of new jobs got created, and therefore the GDP growth and the economy was doing quite well until about 2008.

Basically things were more or less good for some time and that was mainly because the global economy was going through a boom and so India too enjoyed some benefits of that. 

But then came 2008 and with it came the great recession.

[We hear a news anchor talking about the Wall Street Crisis.]

A recession, if we have to define it very broadly, is a decline or stagnation in economic growth. And in 2008, the world witnessed one such recession. It is said to have begun in the US but its impact was felt all over the world.

I won’t go into the details of this crisis in this episode but what happened in 2008 is that financial markets, as well as banking and real estate sectors in the US were completely ruined. Millions of people lost their life savings, their jobs and their homes. 

[We hear a news clip about the crisis.]

This crisis also had a huge impact on the world economy — many countries saw their exports reduce and Basically, money from all over the world began to return to the US.

India too was affected by this and as a result, our GDP growth fell. What did India do then?

Puja Mehra
When such a thing happens,it is possible for economies, for government to take policy measures, and the responses that India took made sure that in two years, India’s growth rate — it did not go back to the 9% + growth rate that India was seeing before this crisis happened — but it recovered quite a bit.

Right, like Puja says here, the Indian government back then introduced a number of policies to cushion the blow of this big global event on India and to get India’s GDP growth back on track. The government introduced a mini-budget of sorts which included things like spending on infrastructure, lower tax rates etc. These were just a few of the many things that the government did.

So, that was good and there was recovery in the GDP growth but soon things took a turn for the worse.

Puja Mehra
All the policies that India had put in place to deal with the impact of the global financial crisis needed to be temporary measures. They were allowed to go on for far too long. Eventually some policy mistakes were also made because of which the economic growth started to slow down.

In a way, what was like medicine for our GDP growth in 2008 turned out to become a problem in just a few years after because it had been administered for too long. What this also shows is that a policy that works for GDP growth at one time need not work at another.

So GDP growth started to slow down and the recovery that India had made was lost. Then the UPA government also faced allegations of corruption which affected the GDP growth even further. You might remember the 2g spectrum case. Then came a crisis in the banking sector thanks to this falling GDP growth rate. Finally, a major shock came when oil prices went up in 2013.

So, basically, by 2014, because of a number of factors, GDP Growth came down quite a bit again.

Then the Modi government came to power. 

[We hear a news clip about BJP coming to power.]

Puja Mehra
After 2014, there was a lot of hope because there was a political change in the government and it was thought that a lot policy steps will be taken to ease some of these problems, specially in the banking sector. Because of that hope and because of some policy steps that were actually taken, the growth improved for a couple of years but the steps that were taken were not enough. 

Basically, the same story repeats. Some policies taken by the government help in improving the GDP growth and some others backfire. 

Puja Mehra
Some new policy mistakes also happened such as demonetisation, not a very good GST,  a GST which actually made it very difficult for companies to do business. Also not enough steps were taken to, in time, solve the problems which were now becoming very very difficult in the banking sector. GDP growth again, even though it had recovered a bit, it again, began to slow down. And that slowdown has now been on for 3 years. 

[We hear a news clip from NDTV]

Ravish Kumar
Namaskar main Ravish Kumar, Iss saal GDP ki doosri timahi ki aakhade aagaye hain. GDP dar peechle teemahi se bhi ghat gayi hain. 5% se 4.5% par aagayi hain. Pichale 26 teemahiyon mein yeh sabse kharab pradarshan hai.

Like Ravish ji says here in this news clip from November last year, GDP growth had already slowed down quite a bit and it was only slowing down further and further. The state of our economy had become a matter of concern last year itself. And then Coronavirus reached India.

Puja Mehra
Now Covid-19 is a fresh shock, which changes a lot of things, which will have real economic consequences of its own, and GDP growth will show that when the estimates come out. It’s likely to be quite low, much lower than 5%.

What Puja Mehra is talking about are projections for the financial year 2020.

So, what India’s GDP growth story tells us is that there are always a combination of factors that affect the GDP growth rate and every time there is fall or rise, we have to remember to see the different factors that came together to cause this change. And in terms of solutions, the moral of the story is that there is no fool-proof solution to keep GDP growing year-after-year.

Now, I want to talk about one criticism that is made against GDP and that is GDP is not a perfect measure.

[We hear the voice of Dr. Nishikant Dubey in the Lok Sabha.]

Dr. Nishikant Dubey
Yeh Kuznets saab ne kaha ki GDP ko hi Bible maanlena, Ramayan-Mahabharat maan le na satya nahin hai. Aur future mein GDP ka bahut zyada upyog nahi hoga.

That was BJP MP Nishikant Dubey telling the Lok Sabha in December 2019 that GDP is not a good indicator of an economy’s health. 

Is he right?

The answer is both yes and no.

The truth is that there are many people world over who believe that GDP is not a valid metric to measure an economy’s health — that we need something better, some other indicator.

Their complaint with GDP is that it does not take into account factors like population, distribution of resources, participation of people in the economy. What they are saying is, if the GDP in a country is rising, it does not necessarily mean that all the people in that country are doing better, because the rise may be concentrated in the hands of very few individuals or firms.

One of the other consistent criticisms against GDP is that it does not take into account the unpaid work, labour and contribution of someone like a homemaker. 

India too has time and again debated whether the GDP is a good indicator to gauge its economy. 

We don’t have answers to some of these criticisms yet. But the thing is this: GDP may not be a comprehensive indicator to judge the health of an economy BUT in the absence of an alternative, it remains the most reliable indicator — at least from a bird’s eye view. 

So, for now, GDP exists, and that is our measure. 

And this, in a nutshell, is the story of GDP. 

Chaliye, agle hafte milte hain.

Credits

Narrated by – Dhruv Rathee
Producer – Gaurav Vaz
Research help –
Written by –

Title Track Design – Abhijith Nath
Audio Production –