GDP falls short in capturing true economic progress

Dipak Kurmi

(The writer can be reached at dipaknewslive@gmail.com)

When a country’s economy grows, it signifies greater access to goods and services for everyone. The Gross Domestic Product (GDP) growth closely follows the expansion in the production and supply of essential goods and services, including electricity generation and consumption, coal, steel, and cement production, overall industrial output, credit to industry, housing loans and sales, vehicle sales, crop production, air passenger traffic, foreign tourism, sales of fast-moving consumer goods (FMCG), operating profits of IT-service companies, and telecommunication services. These industries cover a wide range of goods and services, including financial, real estate, transport, and communication services.

Whether the indicators for the output and consumption of key goods and services have tracked the official GDP growth figures over a period of five years before the COVID pandemic. The comparison is mainly between the financial years 2014–15 and 2019–20, with some exceptions where the data is available on a calendar-year basis. The purpose of this analysis is to remove any disruptions created by the pandemic and determine if the indicators provide an accurate reflection of GDP growth during this period.

During the periods of 2014–15 and 2019–20, India’s real GDP grew annually at a rate of 6.7 percent, while electricity generation grew at a rate of 4.6 percent per year and per capita electricity consumption grew at 3.6 percent per year. This is a significant indicator as electricity is used in both households and industrial production. However, electricity generation and consumption grew at a slower rate of two percentage points less than the overall economy.

Throughout the periods of 2014–15 and 2019–20, India’s Index of Industrial Production (IIP) grew annually at an average of 2.8 percent, nearly four percentage points lower than the GDP growth. The output of coal, steel, and cement production also grew at a slower rate than the economy, with coal output growing at 3.5 percent, steel at 4.6 percent, and cement production at just 4.3 percent. Each of these key inputs grew at a rate 2-3 percentage points lower than the economy, indicating slower growth in the factory sector.

In the course of 2014–15 and 2019–20, the auto sector in India, which has a significant growth multiplier, experienced slow growth. Passenger vehicle sales grew at an annual rate of just 1.3 percent, two-wheeler sales at 1.7 percent, commercial vehicle sales at 3.1 percent, and tractor sales at 5.2 percent. Each segment of the auto sector grew at a rate significantly lower than the country’s GDP, indicating slower growth in the sector.

The growth of the transportation sector is often faster than the growth of the national income as the economy grows. However, the sales of vehicles in India did not match the country’s GDP growth rate, indicating slower growth in the sector. Despite this, one can expect an increase in fuel consumption due to an increase in the number of trips between points. However, fuel consumption between 2014–15 and 2019–20 only increased by 3.3 percent per year, which is less than half of the GDP growth rate. Even rail freight traffic grew at a slow pace of just 2 percent per year.

Bank credit to industry grew at a very slow rate of just 2.1 percent per year, in nominal terms, between 2014–15 and 2019–20, while in real terms, it declined at the same rate per year. This slow pace of growth is in line with the growth of other key industries and sectors such as auto sales, fuel consumption, and rail freight traffic, which also grew at a rate significantly lower than India’s GDP growth rate during this period. The only areas where growth was slightly higher than the economy were home loans and loans for commercial real estate, which grew at 7.1 percent per year.

Despite the growth in home loans, home sales fell sharply at an annual rate of 5.3 percent in the top seven cities of India between 2014–15 and 2019–20. This decline in big-ticket purchases is also evident in the slowdown of car sales and loans taken for purchasing durables, which grew at just 1 percent per year in nominal terms and fell at the rate of 3.1 percent in inflation-adjusted terms.

While several key industries and sectors witnessed a slow pace of growth in the five-year period before the COVID pandemic, the aviation and communications services sectors grew at a much faster pace. Air passenger traffic grew at an annual rate of 12.2 percent, while foreign tourist arrivals increased by 6.4 percent per year. In telecom, the number of minutes used per consumer grew by 12.9 percent per year, but average revenue per user fell by 9.3 percent per year. Despite this, the number of telecom subscribers increased by 3.4 percent annually.

The growth in key consumption goods in India has been slow in recent years, with crop output growing at just 3.2 percent and foodgrain production growing at 3.8 percent. Hindustan Unilever Limited, the country’s largest FMCG company, saw real net sales growth of only 4.7 percent per year, despite an increase in market share for big-listed companies after the implementation of GST in 2017. This suggests that the overall FMCG market in India has grown at a slower pace. India’s IT services sector, which plays a significant role in the country’s economic growth, has not grown at the same pace as its GDP. The real operating profit of India’s top IT-services firm, TCS, has grown by 6.2 percent, while that of Infosys has grown by just 0.9 percent after adjusting for inflation.

Many important sectors of the Indian economy, such as auto, bank credit to industry, durables, and FMCG, have grown at a slower pace than the country’s GDP over the past five years. Even home sales and loans for purchasing durables fell. However, some services, such as aviation and communications, have grown faster. India’s IT services, a crucial sector for the country’s growth, have also not grown at the same pace as the GDP. This raises a conundrum for economists to solve in order to understand the true state of India’s economy.