GDP: A Misnomer? And Misinterpretations in the Context of India’s Economy….

Everyone talks about GDP.?Economists of all sorts care about GDP. From a layman to the lover of economics, from a Globetrotter to a Geopolitical Strategist, GDP is a "go-to metric” to compare and examine the size and strength of nation-states. Despite its popularity, GDP is a misnomer and it does not effectively measure gross domestic product, rather it captures gross domestic money movement; because, most glaringly, the prices often do not reflect the intrinsic worth of products, services, and labor.

GDP (Gross Domestic Product) is one of the most extensively used measures of an economy’s output or production. It is defined as the total monetary value of goods and services produced within a country’s borders in a specific time period —?monthly, quarterly, or annually. GDP is considered an accurate indication of an economy's size by most economists and policymakers. The GDP growth rate is often advocated as the single best indicator of economic growth. GDP per capita is believed to be in close correlation with the trend in living standards over time. Economists Paul A. Samuelson and William Nordhaus observed, “While GDP and the rest of the national income accounts may seem to be arcane concepts, they are truly among the great inventions of the twentieth century.”?In their popular book on the subject of Economics, they praise the ability of GDP concept to present an overall picture of the state of the economy. GDP allows policymakers and central banks to judge whether the economy is contracting or expanding, whether it needs a boost or restraint, and whether a threat such as a recession or inflation clouding an economy.

GDP can be calculated either through the expenditure approach (the sum total of what everyone in an economy spent over a particular period; GDP = Consumption + Investments + Govt. spending + (Exports – Imports) or the income approach (the total of what everyone earned). Both should produce the same result. A third method – the value-added approach —?is used to calculate GDP by industry. Notwithstanding the method employed for its calculation, GDP measure is primarily an aggregate monetary value of all economic output in a Nation. That means, most of the components included in the estimation should reflect the?market prices?of the respective economic outputs in various sectors.?With the income approach, the price/cost of labor should be reflected. Apparently, the GDP estimates are supposed to reflect the volume of transactions/unit outputs multiplied by their respective market prices in a given period. Of course, it is also known that these total estimations are adjusted for inflation or deflation indices in reference to a base year to calculate the real GDP.

I would like to draw your attention to the limitations of GDP measures based on the following premises and address why we need to exercise caution in applying GDP to examine emerging economies, particularly large populous nations like India.?This is significant given the policy thrust,?post-COVID scenario, and global politics around this topic of GDP; see the following news...(https://www.indiatoday.in/business/story/explained-why-imf-slashed-india-s-growth-forecast-sharply-in-latest-economic-outlook-1833622-2021-07-28).

First, the market prices of many products and commodities do not reflect the real cost of production or the quality of the products, for the reason the marketing and pricing strategies in many industries are not really tied to the cost (supply) factors, rather based on political, competitive, global, and long-term strategic interests. In short, prices may be overstated or understated not reflecting the real or intrinsic worth of the labor and other costs of factors of production. For instance, in several critical sectors of the economy like metals, agriculture, manufacturing, and electronics the?prices have been declining?steadily for the past few decades. And so does the income level of people?working in these traditional ?sectors. Such declining prices/employee wages might be due to over-capacity forcing the price wars, intense competition, currency value fluctuations, trade wars, or expanding global market size resulting in scale economies.?Many industries have delivered a tremendous volume of product output despite mounting losses.?See the price trends of Electronics.

Even after the GDP estimations are adjusted with inflation or deflation index, the estimate will not adequately reflect the price declining effect on the economic / volume output.?Moreover, in recent decades, inflation does not appear to be stemming from the economic/production activities that account for employment, infrastructure, and value creation in society - rather mostly arising from speculative economic activities in industries such as?real estate, stocks, and other financial services. Whatever the reason, when the prices are steadily falling while the output volume rising across many critical sectors, what will be the net effect on national GDP? What are the implications for policymaking? Most likely,?the real production and value creation activities are being undervalued and under-represented - which is a central problem arising due to inefficient markets and unhealthy competition within and across sectors.

In contrast, however, the rise in oil prices may have adverse consequences on several critical sectors and may stunt the growth of an economy and Please see the chart of oil prices vs US GDP growth trends. The bottom chart depicts India's GDP Vs Crude oil prices. Whenever the oil price goes up GDP gets stagnant.

Second, the GDP measures and growth rates are not addressed in light of the sectoral differences in terms of the volume of outputs /transactions or their respective periodic growth rates.

Third, often the GDP figures of nations are compared on the basis of the US. $ value (after adjusting for purchasing power parity), since the US Dollar is a dominant global currency. Such comparisons, neglect the power of volume of economic transactions within several critical sectors of a Nation. Within many emerging economies, the economic transactions in several industries do not enjoy premium prices because of the quality issues, the inability of the products to reach global markets, or the stage of economic evolution is such that low price is the inescapable predicament.?When we read, US GDP - $20 Trillion+, China GDP - $10 Trillion +, India - $3 Trillion and Australia - $ 2 Trillion - we have to exercise caution here. Do these numbers really capture the true size of the respective economies? For instance, consider the economies like Canada and Australia with populations less than 50 million people. How would these economies rank in parity with Nations such as India - a highly industrialized economy with 1.25 billion people? One can presume that India and Chinese economies can be several folds bigger and stronger than what the GDP figures would suggest (in terms of US $). For instance, in 2019, about 3 million cars and 21 million motorcycles sold in India - a figure comparable to any big industrialized economy.

Fourth, when we subtract or adjust for all the costs of risk, trash, and the externalities (that accrue due to mere speculative growth of assets value, consumer gratification, packaging, and credit card burden) - from the GDP estimates,?one would arrive at a different picture on the size, strength, stability, and robustness of an economy. One can surmise,?even the GDP estimates of the mature American economy would not accurately reflect?the true value and strength of the US economic output.?

In light of the above observations, the?recent misinterpretations?and misapprehensions about India’s GDP growth rate are addressed here.

There is much a write & talk about the Indian economy and its growth rate in recent times based on GDP statistics. Do such data, economic indicators and opinions based on these numbers have any significance for a growing diverse economy like India? In my opinion, for most people, for most sectors and industries, and for the most part, they are practically irrelevant in the long-term.

The data and interpretations of GDP and its growth rate on a short-term basis like quarterly or monthly has only relevance for short-term investors in money and stocks....and such information has no relevance for the whole economy or investors in a diverse and self-reliant economy like India.

However, I would like to express a caveat: Such short-term analyses and policies based on economic numbers and their quarterly fluctuations primarily catering to the interests of short-term investors will have an adverse impact on the whole economy in the long-term...

1) First, the GDP numbers are subject to many biases, miscalculations, and misinterpretations because they don't capture the sectoral or industrial differences in terms of their respective volume of transactions and growth rates. For example, the steel, cement, and appliances sales have been growing at the rate of more than 10% per year...but the actual prices in these industries have not been rising in line with the inflationary trends...prices might be constant or falling, despite heavy demand and volume growth, due to competition and spending power limitations of the consumers. In this context GDP growth figure will appear smaller...probably even much smaller after adjusting for inflation...

2) India is a diverse economy... Tribal, rural, agrarian, industrialized urban, real estate driven cosmopolitan and so on....No standardized or aggregate data would ever present a good complete picture of the whole economy. More than 50% of the economic activities and transactions (rural, tribal, agrarian sources) are neither driven by stock markets nor directly dependent on their performance...On the contrary, the financial markets, cosmopolitan real estate markets tied to the global economy are dependent on the economic well-being of the rural, agrarian, and tribal economies within India.

3) Quarterly numbers would not make any sense for a large nation like India which is subject to seasonal, yearly, and geographical variations in terms of growth. Like the North-South divide and East-West divide. Although it is agreeable that some measures taken by the current government like demonetization, GST, and tax policies might have affected the purchasing power and in turn growth, a little - not because of any policy error but due to poor implementation. However, with a swift response of policies and instruments (some tacit Keynesian measures) like health insurance, crop insurance, farm subsidies, irrigation, and rural infrastructure investments that would promote food production, construction, and industries, the Indian economy can easily rise above 10% growth rate.?

4) Sales data from leading companies in Steel, oil, automobiles, motorcycles, construction, electronics, appliances all suggest a growth rate of about 5 to 20%. I guess, after taking into account their secondary and tertiary effects on the whole economy, India could be easily growing at a rate of more than 7%.

5)?Spending for defense, space research, state-of-art technology, healthcare, public infrastructure, agriculture, and irrigation development generating growth opportunities for indigenous production capabilities should not be a cause of concern (like inflation); rather such govt. spending would be a source of advantage for everything in the economy in the long-term. In fact, it will result in a higher quality of life, a better standard of living, and help sustain the currency value. In this light, Moody's rating or IMF ranting should not be a major concern for policymaking.?

6) What I am suggesting is.. the actual production volume of goods and services, their intrinsic worth, and long-term growth matter....more than the monetary and inflation-adjusted measures of GDP... By maintaining adequate production and supply in critical sectors, and by sustaining the purchasing power, there should not be any major concern about economic growth.

7) When the savings, especially retirement savings are vested into the stock market with the guarantee of reasonable returns and effective governance, most of the public firms and the Indian economy overall would not have to worry about the growth at all. Of course, on any ground, the market value of such retirement funds should not be allowed to go bust in the guise of bear markets or volatility. Even the American stock market - with all its inefficiency and speculative blunders – is primarily sustained by retirement savings pouring into the market month after month in the form of mutual funds. (About $1.5 T flows annually from tax-deferred retirement accounts alone into the US stock market)

8) Can you believe the data presented in the adjacent Chart? An industrialized nation like India with 1.25 billion people would have a GDP less than that of the UK, Brazil, Australia, or Canada... the nations with less than 1/10th the population of?India. SO, the above chart is nowhere near an accurate representation of Indian economy. This is because, we have the tendency to look at data like GDP in terms of US $, because of its power in global trade and we are missing the data on the voluminous transactions in many under-valued / underpriced sectors of large economies in the GDP data. The dollar-based GDP numbers can be fundamentally wrong and might lead to misguided policies.?There is a saying in economics - one can get more bang for the buck...but, the Indian GDP figure in US dollar term does not get the real picture....that is the information on the volume of transactions missing. The value additions and market appraisal of the most popular and fast growing industries, and mere currency values often dictate the size of GDP. Given the limitations stemming from quality issues, price latitude, and global reach of Indian goods & services....the price-based, dollar-based comparisons of Indian GDP with that of economies like the U.S. or Canada, or China cannot tell a complete story of the full potential of Indian economy, businesses or its people. Once the quality of economic transactions increases, the Indian economy will soon hit high numbers and be ranked on par with the big league.

To summarize the above view: For the GDP and GDP Per Capita metrics to make sense, one has to consider the following more judiciously. 1) Both quantity (volume of transactions across sectors) and quality of products and services in the economy matter a lot (because prices and their effect on the total national income will not capture the quality and quantity e dimensions - which matter for the business and economic development).

2) Nature of income distribution across the layers of a society matter and should be considered in the analysis; otherwise, mere GDP and GDP per capita will be misleading the analyst. For instance, a large populous nation will never match with GDP per capita of a less populous nation which is making most of the income through a few sectors of the economy. We will be missing the information of market potential of a large percentage of population/segments with high income in a large populous economy?– These segments can be easily comparable to that of any high income nation (in terms of size and purchasing power).

3) How the majority of the income is made in an economy matters. Whether the economy largely function in a sustainable production and consumption basis, or whether?unsustainable and unproductive production and consumption dominate the income figures. (for instance, shadow economy, illicit drugs, debts, credit card loans, and unsustainable imports, and highly speculative financial and real estate markets may not add real value by contributing for employment, production, and consumption that improve the standard of living, quality of life, and strength of a national economy). Even inefficient stock markets and volatile financial markets may have such a degenerative impact on the economy. Highly inflated real estate prices on the one hand and low employment generation, on the other hand, will result in GDP metrics misrepresentation. (Please refer to my works on Market Inefficiency and the Confounding effects of inefficient markets on LinkedIn).

Several studies (Dimson et al. [2002], Ritter [2005]) have examined whether long-run real GDP growth, the stock market growth, and long-run stock returns sail along. The surprising result was contrary to expectations -- the correlation between stock market growth & returns and economic growth can be even negative! A recent study confirms this empirical finding. This study examined the stock returns versus GDP growth for eight developed national markets between 1958 and 2008 and revealed a negative correlation.

The implication for the above observations is that:?Although stock Indices may double or triple in 10 years…the GDP may not grow in correspondence within the same period. And GDP metrics also may not accurately reflect the employment, income distribution, and real growth/market potential of an economy. We need to configure why the financial market indices are not strongly connected to GDP, and Why GDP metrics are not strongly connected to employment, income distribution, and standard of living.

Does GDP need to really grow big in terms of monetary value??Given the sustainability crisis of modern economies, should we need to consider alternate economic models – where people are happier and self-content with a simpler healthier life?

Think about it...

Is There a Link Between GDP Growth and Equity Returns? | May 2010 . MSCI Barra Research Bulletin.

Bradford Cornell, Economic Growth and Equity Investing, Financial Analyst Journal, Volume 66, 2010.?

Jeffrey J. Diermeier, Roger G. Ibbotson and Laurence B. Siegel, The Supply of Capital Market Returns, Financial Analyst Journal, March/April 1984, 74 – 80.

?Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns, 2002, Princeton University Press, Princeton.

?Jay R. Ritter, Economic growth and equity returns, Pacific-Basin Finance Journal 13 (2005) 489 – 503.

Senthil Kumar Muthusamy, 2022.?Market Efficiency or Lack Thereof: A Critique and Rethinking on Corporate Governance https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2592843

Senthil Kumar Muthusamy, 2022. Confounding Effects of Market Inefficiency: A Crisis in the Financial Markets and National Economy. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3983749