7.8% growth. So why doesn't India feel richer?

Snigdha Sharma (0:01)

In 2017, a former governor of the Reserve Bank of India said something really important about India's economic data keeping.

At the time though, it was more like a dry observation coming from a man who had spent decades inside the system.

YV. Reddy, one of the most respected economists that this country has ever produced, looked at what was happening to India's official data and said, in India, not only is the future uncertain, even the past is uncertain. So they keep revising the data.

Now, almost a decade later though, his words sound something closer to a prophecy. Because earlier this week, India announced that it is overhauling the way that it calculates GDP, the most important economic number. We will now have a new base here, new methodology and new price data. The government is saying that this is an upgrade. Now our GDP will be more accurate and more in line with how the rest of the world does it. But if the past was already uncertain, if we've been measuring ourselves with a ruler that was systematically off, then what does that mean for the story that India has been telling about itself? You know that story, the one that's been saying, we are the world's fastest growing major economy, 7%, 8%, sometimes even more.

Last November, the International Monetary Fund or IMF, looked at how India calculates the number and gave it a C, like a C in your report card. So today, I thought we should try to understand what exactly was India doing wrong? What has just changed? And does any of this actually tell us how 1.4 billion people are really doing? To answer these questions, we need to go back 90 years to a 33-year-old economist sitting in America in the middle of the Great Depression trying to answer a much simpler version of the same question.

How do you measure an entire economy in a single number? His answer changed the world, but he spent the rest of his life regretting it.

Welcome to Daybreak, a business podcast from The Ken. I'm your host Snigdha Sharma, and I don't chase the news cycle. Instead, every day of the week, my colleague Rachel Varghese and I will come to you with one business story that is worth understanding and worth your time.

In 1934, Simon Kuznets sat down to write a report for the United States Congress. This was when the country was in the depths of the Great Depression. A quarter of Americans were out of work, banks had collapsed, bread lines were stretched around the block, and nobody, not the government, not the Fed, not Wall Street, could say with any precision how bad things actually were. Especially not in numbers. So Kuznets built a measure. He added up everything that the American economy produced in a single year and compressed it to a single number. The Congress loved it. Governments around the world copied it, and after the Second World War, the IMF and the World Bank made it the universal language of economic progress. During the Cold War, it actually became like a scoreboard. But here is what almost nobody remembers. In that very first report to the Congress, the same document that introduced the measure, Kuznets wrote that the welfare of a nation can barely be inferred from a measurement of national income. And then, he spent the next four decades saying that GDP was being misused, that it counted the wrong things, and it missed what actually mattered. He won the Nobel Prize in 1971, but by then, nobody was listening to him. And this tension between what GDP measures and what we want it to mean is exactly what caught up with India. Now, GDP sounds like it should be simple. Add up everything that an economy produces to get a number. But the hard part isn't addition. It is inflation. Let's say, if your economy grew 10% in rupee terms, but prices also rose by 10%, your real growth is zero. So statisticians strip out inflation using something called a price deflator, which is essentially a yardstick for how much prices changed. India's yardstick was the wrong one. It was using wholesale prices, which is the prices of goods moving between factories and suppliers rather than what consumers actually pay. In years when global commodity prices crashed, wholesale inflation fell sharply. So when you divide nominal growth by a small deflator, real GDP looks enormous, even if nothing on the ground has changed. Like salaries have not moved, jobs are down, but the number does not reflect this. And this is the trap that India was in. And it wasn't a secret. As far back as 2015, economists started noticing that the headline number and virtually every other economic indicator were telling different stories. Electricity consumption, railway free, two-wheeler sales, credit growth, all of them looked sluggish. The GDP, meanwhile, was doing the opposite. The most explosive version of this critique actually came from an unlikely source. Arvind Subramanian had been the government's own chief economic advisor from 2014 to 2018 He's the man who wrote the economic survey, the government's flagship economic document. In 2019, months after leaving its office, he published a paper at Howard estimating that India's actual growth between 2011 and 2017 may have been around 4.5%, not the 7% being reported. He tracked 17 different economic indicators, and all of them diverged from the official GDP after the 2015 methodology change. In his own words, he had raised these doubts, and I quote, frequently within government. But he needed to be outside to say it publicly.