Indian Express Editorial Analysis

29-March-2024

1. The deflator problem

Topic: GS3 – Indian Economy – Issues relating to growth
This topic is relevant for both Prelims and Mains in the context of understanding the nuances of economic concepts such as GDP measurement, inflation, and economic growth.

Context:

The Indian economy has demonstrated a growth rate of 7-8% in recent times, showcasing apparent resilience post-pandemic.
However, uncertainties loom due to measurement issues, particularly concerning the GDP deflator.
This analysis will delve into the complexities surrounding these measurement challenges and propose potential solutions.

Measurement Issues with GDP Deflator:
Old vs. New Methodologies

In the past, real GDP estimates heavily relied on volume-based indices, with the deflator playing a minimal role.
However, since 2015, a new methodology measures GDP in nominal terms, subsequently deflating it with price indices to derive real figures.
Consequently, inaccuracies in the deflator significantly impact real growth rates, as observed in recent data.

Problem with GDP Deflator:

Two main problems plague India’s GDP deflator.
Firstly, the National Statistics Office (NSO) uses the wholesale price index (WPI) as a proxy for the producer price index (PPI), lacking accuracy in tracking producer prices, especially in the services sector.
Secondly, India’s methodology differs from G20 countries in calculating real gross value added (GVA) in manufacturing, leading to potential misinterpretations of growth rates.

Implications and Solutions:
Impact on Growth Rates

The discrepancy between input and output prices, exacerbated by using a single deflator, distorts real growth rates.
For instance, falling input prices coupled with rising output prices inflate nominal value added, leading to overestimated growth rates.

Interim Solution: Using CPI:

An interim solution involves utilizing the consumer price index (CPI) to deflate nominal value added, providing a more accurate representation of producer prices.
This adjustment could significantly impact growth rate estimates, particularly in manufacturing and services sectors.

Conclusion:

The reliance on inaccurate deflators poses significant challenges to accurately gauging India’s economic growth.
Implementing the CPI as a deflator and adopting double deflation methodologies in line with international standards could mitigate these distortions.
As GDP data holds immense importance, it is imperative for the NSO to prioritize resolving these measurement biases promptly.

ISSUES IN GDP ESTIMATION

OUTDATED BASE YEAR

The country’s GDP is presently computed with the base year of 2011-12 which is now more than 10 years old.
GDP estimates based on an outdated base year would not adequately capture new activities being undertaken in the economy.

VARIATION IN GDP FIGURES DUE TO DISTINCT METHOD OF CALCULATION

As India’s GDP is calculated using three methods.
Each method produced distinct result led to variation in data due to their assessment method which create confusion.

DON’T TAKE INTO ACCOUNT SURVEYS

Ministry of Statistics and Programme Implementation (MoSPI) has not come out with the results of various surveys like the consumer expenditure survey and the annual survey on unincorporated enterprises which are crucial for the base revision exercise.

IMPACT ON PUBLIC PERCEPTION

Experts express concern that presenting an overly positive image of economic growth through GDP figures can mask the economic struggles and challenges faced by a significant portion of the population.
This can impact public perception and policy decisions.

CANT ASSESS INCOME INEQUALITY

GDP does not account for income distribution in any way i.e distribution of income amongst and within households or different economic classes in given societies is not captured by GDP data.
Therefore, much of the work done by people today remains under-measured or largely unaccounted for.
For most studies measuring and accounting for trends in income inequality, survey methods based on consumer spending and consumption behaviour are used and relied upon.

CANNOT CAPTURE WELL BEING AND GREEN GROWTH

However, GDP has been the main way in which success has been measured but it is designed to measure only production capacity and economic growth.
GDP was not designed to assess welfare or the well being of citizens. It does not capture green growth and environmental sustainability.
Therefore, GDP is a limited measure of a country’s development success, as it ignores other important factors.

NO NEW FRESH SURVEYS

New indicators are required based on fresh surveys. But no new survey of the unorganised sector has been conducted since 2015. Even the census has not been conducted in 2021.
So the method used is seriously flawed. Finally, projecting the past annual numbers and dividing by four to get the quarterly figure is also seriously flawed when there is a shock to the economy at some point during the year.

DISCREPANCIES IN GDP CALCULATION

An analysis of the GDP expenditure components reveals a concerning trend that there is an unexplained gap in the GDP calculation.
It raises questions about the accuracy of the reported economic data.

PYQ: Explain the difference between computing methodology of India’s gross domestic product (GDP) before the year 2015 and after the year 2015. (150 words/10m) (UPSC CSE (M) GS-3 2021)

Practice Question: What are the critical measurement issues impacting the assessment of India’s economic growth, particularly focusing on the GDP deflator, and what strategies can be adopted to address these challenges effectively? (150 words/10 m)

2. YOUNG AND THE OLD

Topic: GS1 – Society – Population and associated issues,
This topic is relevant for both Prelims and Mains in the context of understanding the implications of India’s ageing population on various aspects of society, economy, and governance.

Context:

The analysis highlights a significant demographic shift expected in India over the next three decades, as indicated by a report in The Lancet.
It projects a considerable decrease in the total fertility rate (TFR) to 1.29 by 2050, accompanied by a substantial increase in the proportion of the elderly population, with one in five individuals expected to be above the age of 60 by mid-century.
This demographic transformation underscores the importance of proactive preparation by policymakers to address the challenges posed by an ageing society.

Lessons from Global Experiences:

Drawing parallels with global experiences, the analysis references China’s demographic trajectory, where a decline in the working-age population coincided with economic growth despite pro-population growth measures.
The history of developed nations further suggests the difficulty of raising fertility rates once they fall below replacement levels.
With India’s TFR hovering just below replacement rate at 1.9, policymakers must capitalize on the current demographic window to maximize the country’s demographic dividend, akin to China’s approach in the late 1980s to the early 2000s.

Policy Imperatives for Maximizing Demographic Dividend:

The analysis emphasizes the urgency for policymakers to implement measures aimed at overcoming skill deficits, fostering growth in the knowledge economy, and generating quality employment opportunities outside the agricultural sector.
It underscores the importance of avoiding dependence on low-paid informal jobs and ensuring adequate social security and healthcare provisions for the growing elderly population.
Furthermore, there is a need to effectively harness the skills of the ageing workforce and create opportunities for their meaningful participation in the economy.

Regional Variations and Unique Challenges:

Highlighting regional variations in TFR rates across states in India, the analysis underscores the unique challenges this presents to policymakers.
Certain regions, particularly in South and West India, are experiencing faster population ageing compared to others.
Policymakers must be attuned to these regional dynamics and tailor strategies accordingly to address the diverse needs arising from the demographic shift.

Conclusion:

The analysis underscores the importance of recognizing and preparing for India’s impending demographic transition.
Policymakers must act swiftly to leverage the current demographic dividend, invest in human capital development, and implement policies that promote inclusive growth and social protection.
By understanding the multifaceted dimensions of the demographic shift and adopting proactive measures, India can navigate the challenges and capitalize on the opportunities presented by its changing population dynamics.

Key highlights of the study

Global trends in Total Fertility Rate (TFR)

- Researchers estimate that by 2050, 155 of 204 countries (76% of the world) will be below the replacement level of fertility.

The number of countries and territories below replacement level is predicted to further increase to 198 (97%) by 2100.

- This means that in these locations, populations will shrink unless low fertility can be offset by ethical and effective immigration.

Decline in India’s fertility rate
In India, the TFR was 6.18 in 1950 which reduced to 4.60 in 1980 and further declined to 1.91 in 2021.

- TFR at 1.9 is below the necessary replacement fertility level of 2.1.

- It is projected to dip further to 1.29 in 2050 and 1.04 in 2100.

Livebirths in India

- In India there were more than 1.6 crore livebirths in 1950 and over 2.2 crore in 2021. The number is projected to fall to 1.3 crore in 2050.

Why fertility went down in India?

Role of Family Welfare Programme

- Post-independence, there was a need to restrict the population. So, the Family Welfare Programme, including maternal and child health-related cash transfer inducements, were intended to convince people to have no more than two children.

- Slowly that behaviour change started showing up.

Small families became the norm

- Infant mortality declined substantially because of various maternal and child health-related programmes and successful immunisation.

- As a result, child survival was guaranteed and hence small families became the norm.

Economic factors
With development, the inter-generational flow of wealth has reversed.

- - This means parents now do not receive much benefit from their children the way they used to.

- - Now, elderly parents may find themselves relying less on their children for financial support.

- Instead, they might depend more on their own savings, retirement plans, or government assistance programs.

- This has influenced their decision to have an additional child that would involve a substantial cost of bringing them up.

Rise in Female literacy and women’s participation in the workforce

- Career consciousness, financial returns and economic independence have meant that women are reconsidering their options of having a second child.

What are long-term consequences?

The consequences of fertility decline will be that the share of the elderly in the population will increase sharply.

- By 2050 the share of senior citizens in India will be more than 20%.

It will also lead to challenges like labour force shortages and potential social imbalances due to gender preferences.

PYQ: “Empowering women is the key to control population growth”. Discuss (150 words/10m) (UPSC CSE (M) GS-1 2019)

Practice Question: Explain the concept of India’s demographic dividend. How does the projected ageing of India’s population impact its socio-economic development? Suggest two policy measures that the government can adopt to address the challenges posed by an ageing population. (250 words/15 m)