New GDP formula fails to reflect actual growth: Raghuram Rajan

Reserve Bank Governor Raghuram RajanReserve Bank Governor Raghuram Rajan on Thursday said the country needs a better methodology to assess economic growth as the new formula to measure it in terms of gross domestic product (GDP) fails to reflect the real picture.

GDP growth rate in India appear strong because of a change in statistical methods that seek to capture more evidence of economic activity. Other barometers such as bank credit growth, jobs and consumer demand, however, paint a less healthy picture.

The new formula to calculate growth, based on market prices, shows India is the fastest-growing major economy in the world. He said there is a need to avoid overlaps for better computation of numbers so as to capture net gains to the economy.

"There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth," Rajan said.

He also discounted claims of India overtaking China on growth saying such talk does not make much sense. ''With five times India's GDP, our 7 per cent economic growth equals less than 1.5 per cent of China's growth in terms of its impact on global growth.

China may be reeling under excessive debt and is painfully readjusting its economic engine towards domestic consumption. The world's second-largest economy has been producing for the world while the world has been producing for India.

While China has its problem adjusting to a domestic consumption-led growth, India is facing a different type of problem with the government's finances in a straight jacket and the private corporate sector staggering under loads of debt, and state-owned banks heading towards bankruptcy, Rajan pointed out.

The new formula calculates growth on the basis of market prices to show India is the fastest-growing major economy in the world, while the statistical methods used to calculate GDP seeks to capture more evidence of economic activity, say critics of the new formula.

Speaking to students at the Indira Gandhi Institute of Development Research, Rajan said, "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."

There are many suggestions from various quarters on the ways to calculate GDP in a better way and we should take those seriously, Rajan said.

It may be noted that even under the new GDP methodology, the economy is seen growing at slower pace in nominal terms than in real terms. In the September quarter, nominal GDP grew at a much slower pace of 6 per cent while real GDP expanded at 7.4 per cent.

Rajan also said the government needs to focus on employment generation and formulate policies geared to face the onslaught of technological innovations.

"We have to make sure that our policies are geared up such that we will create the appropriate playing field to find new jobs. We should not create a distorted playing field where at the end of the day the wrong kinds of jobs emerge," he said.

Lastly, Rajan said there is a need to stop thumping our chests claiming we are the fastest growing economy.

While the politician may feel the need to claim success even if it was largely due to luck, the media needs to be careful in playing it up, he added.