Acronym accompanied by a figure is the business equivalent of torque (Force*Direction). In today’s age of information when everyone wants to feel empowered, knowledge of acronyms and figures serve as firepower to his ammo. Despite accuracy of information, lack of understanding leads to delusion. For instance, most of us know about GDP increment, majority know the GDP value, some know the components but only few understand the method of deriving and utilising the figures.
Before proceeding, let us understand GDP in absolute layman terms – Gross Domestic Product – it includes the funds spent on memorabilia concrete structures, publishing of propaganda content, resources spent on dousing lake fires, highly priced drugs to cope with capitalism induced anxiety, inflated revenues, trade deficit while we still try to Make it in India and diversion of investments from gold to PPF to stocks to..
GDP is the total of all public expenditures, private consumption, net trade and investments
But the figure alone is of little significance. For instance, the current Indian GDP of 2.264 Trillion USD puts us somewhere between UK and Russia. But we still do not swim with the sharks, divide it by population and per capita GDP will put us among the blue fin tunas. The comparativeness may also be questionable. Despite global practices for computation, in absence of regulations the methods are at discretion to individual states.
Recently in India, the ruling party made certain changes leading to accusations of incorporating tweaks to arrive at favourable figures. The alteration includes shifting the base year from previous decade to earlier in the current decade and shift from Input to Output method to derive consumption.
In plain terms, Output method multiplies production to the market rate whereas Input method utilises net income to value consumption, in this case known as Gross Domestic Income. In industry, value is added at each stage; crude oil is extracted and transported which serves input to refinery, where it is distilled and output is sold as fuel, jet fuel, wax, chemicals and so on; which may be further processed. Output method is supposed to measure only the final value; for instance while considering cosmetics, the contribution should only amount to the retail price and not the price of crude oil plus partially processed wax plus final processing plus distributor plus retail.
In certain industries it is not possible to accurately identify value addition, leading to the phenomenon of double counting. Although the implementation of HSN (Harmonised Shipping Number) code in the domestic market facilitates delineation, we are still far from 100%. For instance, one of our clients manufactures a product primarily made of jute, the input as well as output classify as completely processed goods / output and definitely susceptible to double counting. Hence, to avoid such instances industrialised nations like United States and Japan have adopted Input method. Given the Indian government’s current focus on manufacturing, the shift to output method seems to be an irony.
Now moving on to the individual components. These components themselves do not provide any information regarding the utility or return on investment. For instance government spending, infrastructure is usually the largest component and considered as investments given the motive of savings (returns) in long term. Although the absolute figures might be astounding whereas an y-o-y figure may be overwhelming, neither portrays a greater picture. Today tons of money is being spent on fancy projects and memorabilia which may have no substantial returns or run high probabilities of being an NPA (Non-Performing Asset) over time.
Fancy structures like the Dubai frame may boost tourism where the status quo is already established through an all-round development. Whereas in developing countries where foreigners often get molested or beaten up, spending that money on education and security may be of greater utility. Also the per capita utility for frivolous projects like the bullet train can be debated, as instead of benefiting people of few cities, the same budget could have been spent on upgrading the entire rail network, thus benefiting the entire nation.
Also infrastructure spending abroad, run risks of write-offs due to under-performance arising out of unforeseen conditions like geo-politics and regional volatility. For instance, the current Chinese investments in Pakistan may run risks of severe under-performance arising out of regional volatility like recent attacks on Chinese or geo-political measures reducing or hindering business such as the consequences if Pakistan is placed on the Global Terrorist Financing Watchlist.
Hence, one should not consider GDP to conclude upon the prevailing conditions. GDP figures are like revenues, standalone they mean barely anything; e-commerce start-ups are filing revenues in 10,000 crores while their loses simultaneously run to a few thousand crores. Just as an investor would look upon the multiple heads in the balance sheet and income statement along with credit and other worthiness ratings from various agencies to assess a company, we as citizens should dive deeper to assess the performance and ensure that we are headed towards a better future.
You can access World Bank Data here: https://www.google.com/publicdata/explore?ds=wb-wdi
Savvy Munshi 