GDP not accurate measure of economic growth

Aunindyo Chakravarty

Senior Economic Analyst

WHEN a country’s economy grows, it means that everyone gets greater access to goods and services. The Gross Domestic Product (GDP) growth should, therefore, broadly track growth in the production and supply of key goods and services. These include electricity generation and consumption, production of crucial inputs like coal, steel and cement, overall industrial production, credit to industry, home loans, housing sales, car sales, two-wheeler sales, commercial vehicle sales, tractor sales, crop production, air passenger traffic, foreign tourist arrivals, sales of fast-moving consumer goods (FMCG), operating profits of IT-service companies, telecom subscribers, minutes of usage per subscriber and average revenue per telecom user. These cover a wide range of industrial and consumer goods and financial, real estate, transport and communication services.

Have these indicators for output and consumption of key goods and services tracked the official GDP growth figures? I will restrict myself to a five-year period before Covid hit us, to remove any disruptions created by the pandemic. Most of the comparisons will be between the financial years 2014-15 and 2019-20, except for a few where the data is available on calendar-year basis; in these cases, the comparison is between the calendar years of 2014 and 2019.

Between 2014-15 and 2019-20, India’s GDP grew at an annual rate of 6.7 per cent in real, inflation-adjusted, terms. In the same period, our electricity generation grew at 4.6 per cent per year, while per capita electricity consumption grew at just 3.6 per cent per year. This is a crucial indicator to look at, because electricity is used in both industrial production and households. Electricity generation and consumption, therefore, grew at two percentage points less than our overall economy.

What about the factory sector? The Index of Industrial Production (IIP) grew at an annual average of just 2.8 per cent in this period, nearly four percentage points lower than the GDP growth. Coal output grew at just 3.5 per cent, steel at 4.6 per cent and cement production at just 4.3 per cent. Again, each of these key inputs grew at 2-3 percentage points lower than the economy.

One crucial sector, which has a significant growth multiplier, is the auto sector. What happened here? In the five-year period that we are considering, passenger vehicle sales grew at an annual rate of just 1.3 per cent per year, two-wheeler sales grew at 1.7 per cent, sales of commercial vehicles grew at an annual rate of 3.1 per cent and tractor sales grew at 5.2 per cent. Again, each one of the segments of the auto sector grew at a rate significantly lower than our GDP.

As economy grows, its transport sector grows as well, often at a pace faster than the growth in national income. We have already seen that vehicle sales did not match India’s GDP growth rate. However, one can imagine a situation where auto sales have reached a saturation point, and the same number of vehicles can provide for an expanding economy by an increase in the number of trips between points. This would show up in higher fuel consumption. What does the data show? Fuel consumption between 2014-15 and 2019-20 increased by just 3.3 per cent per year; once again less than half our GDP growth rate. Even rail freight traffic grew at a snail’s pace of just 2 per cent per year.

This extremely slow pace of growth in these important industries and sectors is mirrored by the growth in bank credit to industry. After all, when an economy is growing faster, corporates look to take more loans to invest in building capacities and hiring more people. Total credit to industry grew at a measly 2.1 per cent per year, between 2014-15 and 2019-20, in nominal terms. To compare this to GDP growth, we need to adjust it for inflation. In real, inflation-adjusted terms, instead of increasing, credit to industry actually declined at the rate of 2.1 per cent per year. The only reason for bank credit to have grown in real terms is that home loans and loans for commercial real estate grew at 7.1 per cent per year, one of the few indicators to grow slightly faster than the economy.

But if home loans grew, what happened to home sales? Data available for the top seven cities shows that home sales fell sharply in this five-year period, at an annual rate of 5.3 per cent. This slowdown in big-ticket purchases can be seen across a range of durables and assets. We have already seen the slowdown in car sales, the total growth in durable loans suggests a similar trend for white goods. Loans taken for purchasing durables grew at just 1 per cent per year in nominal terms, and fell at the rate of 3.1 per cent in inflation-adjusted terms.

The growth spots were in services like aviation and communications. Air passenger traffic grew at almost double the rate of GDP growth — at 12.2 per cent per year. Foreign tourist arrivals grew at 6.4 per cent per year; it is possible this was partially affected by Covid in 2019-20, since the virus had already affected some countries from which tourists come to India. In telecom, the minutes used per consumer increased at 12.9 per cent per year, but this was mostly because data was handed out for free, causing average revenue per user to fall by 9.3 per cent per year. Even the growth in the number of telecom subscribers slowed down to just 3.4 per cent per year.

In terms of key consumption goods, overall crop output grew at just 3.2 per cent, while foodgrain production grew at 3.8 per cent. India’s biggest FMCG (fast-moving consumer goods) company, Hindustan Unilever Limited, saw a real net sales growth of just 4.7 per cent per year. This despite the fact that big-listed companies have seen a jump in their market share after GST was implemented in 2017, which suggests that the overall FMCG market has grown at a slower pace.

IT services, which are integral to India’s growth story, have also not grown at the same pace as our GDP. The operating profit of India’s leading IT-services firm, TCS, has grown at 6.2 per cent in real terms, while that of Infosys has grown at just 0.9 per cent in inflation-adjusted terms.

Almost every indicator has grown at a significantly slower pace than our official GDP has. It is a conundrum that economists need to solve for us to get a real picture of India’s economy.

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