Reserve Bank of India (RBI) Governor Raghuram Rajan has raised doubts over the >new methodology used to calculate the country’s gross domestic product (GDP) and said policymakers should be careful while arriving at the figure.
“There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth,” Dr. Rajan said while addressing students of the Indira Gandhi Institute of Development Research on Thursday. He cited the example of two mothers who babysit each other’s kids, and said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.
“We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It is important that when they move into newer areas, they are doing something which is adding value. We do lose some, we gain some and what is the net, let us be careful about how we count that,” he said.
The new GDP series, which has been in effect for a year now, has been criticised by economists and academicians as the picture presented by the GDP numbers does not corroborate real economic activities such as corporate profitability or bank loan growth. The country’s GDP numbers were revised with the base year of 2011-12 from the earlier 2004-05. The methodology of calculating GDP was changed as the new methodology takes GDP at market prices into account, which includes indirect taxes and excludes subsidies. Dr. Rajan said that there were many suggestions from various quarters on the ways to calculate GDP in a better way and said such suggestions should be taken seriously.
The Governor also indicated that the country needed policies to incentivise job creation and rued that we have policies directed towards capital subsidies alone. “We subsidise capital in so many ways; apart from direct tax benefits for investment, we also give interest subventions for loans in many situations. We may not do similar things for labour. Clearly, trying to incentivise the employment of labour and especially employment that will add skills to labour is extremely important,” he said.