Black and Grey to White?
In response to the previous post by Reuben bearing us glad tidings about the economy (that it grew at 8.1% last quarter) reader Patel points to a piece on Bloomberg claiming that the growth figures might be incorrect because of statistical fluctuations. But isn’t it possible that something elsee is happening? Much of India’s growth in manufacturing has been taking place in small-scale units which were flying under the radar. So they were missed while calculating the GDP growth so far, and it is only now that those “small-scale” units have started attaining a particular size that they are being sighted. So the GDP growth rate might be an overestimate, the actual GDP might not be. We are starting with a lower base than we should be doing.
I’ve also often pondered on the question of how much of the growth after reforms is simply because some of the economy is moving overground. We have a large black economy and the low taxes of the post-reform era must be giving an incentive to atleast some companies to show legit balancesheets.
I wrote note in response to this on my blog. :-)
Comment by Vikram — October 2, 2005 @ 9:04 am
Economics is fraught with measurement problems and GDP is a good example to help clarify what not to measure in a developing country. Take for example the contribution of women round the house. A large part of labor around the house and tending to livestock etc are done by women around the house.
As you know rearing sheep and tending to cows produces milk and offsprings but the current GDP numbers don’t have a handle on these.
So although I am in favor of having these published often on and blogged about, the usefulness of this exercise past employing a few economists is suspect.
Comment by Kris — October 3, 2005 @ 9:56 am
Ravi,
That brings us to an important question - is some form of taxation essential to just measure the economy?
Comment by Nilu — October 3, 2005 @ 2:10 pm
Gosh, I wish if most problems were this easy and could simply be taxed away.
Economics provides very simplistic notions on a complicated underlying reality — and our historical track record in estimating these is pitiful. The EPW(Economic and Political weekly) had a piece on the Indian GDP revisions about 10years ago that piece may be worthy of your time.
I think this is the Scandal of Estimation. It is often mentioned that the economists/econometricians have been successful in pronouncing 9 out of the 2 recessions in the last decade. Given how poor we are at estimating, I think predicting is fool hardy, especially the future.
Comment by Kris — October 3, 2005 @ 3:53 pm
Kris, can you provide some link to the EPW article?
Nilu, are you asking an ethical question or a practical question? Ethically, I think that whatever the justification for taxing people, saying “We are taxing you so that we can measure the economy” is the weakest one.
On the other hand, the practical point, I suppose, is that the ability to tax the economy gives the rulers a good incentive to measure it. That would have been true in the past in a feudal setup. After his conquest of England in 1066, William the conquerer compiled the doomsday book for exactly that reason - so that he could tax his subjects. But now I suppose it would work the other way round. The fear of taxation will give people an incentive to evade reporting the economy accurately, and government officials do not have an incentive to compile accurate information because unlike in a feudal setup, tax collected legally does not go to their pockets.
Comment by Ravikiran — October 4, 2005 @ 2:17 am
Ravi,
As always, my question had little to with ethics.
I was just wondering, if you had made an assumption that ‘taxation’ was the only way to measure the economy. And, that might even be a valid one in the modern era.
But can you clarify if there is anyway in which the economy can be measured in terms of the total money supply in the market or some other such means?
Comment by Nilu — October 4, 2005 @ 11:56 am
I understand now - your question is much more basic. The size of the economy is measured by the GDP, not by the money supply. Those are two completely different things. It is my firm belief that everyone should understand basic economics just as they should (but don’t) understand Newtonian mechanics at the very least. So as a public service, I had started off a series on GDP calculation when I was blogging at Yazad’s place. You can read them here [1, 2, 3]. Be sure to read the comments as it was a pretty good Q&A session.
Comment by Ravikiran — October 4, 2005 @ 2:50 pm
Ravi, I can’t find the EPW archives they do have some more recent articles online. It is interesting that the times is running a piece on GDP http://www.nytimes.com/2005/10/04/science/04happ.html?hp&ex=1128484800&en=823f1d7db5d77bd3&ei=5094&partner=homepage
Comment by kris — October 4, 2005 @ 7:55 pm
I find India’s growth facinating.
I would really like to understand it more.
Comment by Phil de Fontenay — September 17, 2006 @ 8:16 pm