Demystifying GDP numbers – as articulate a statistician as you will ever find

Demystifying the confusion around GDP figures

Attended an address today by Dr Pronab Sen, former Chief Statistician of India and Chairman National Statistical Commission. I must admit despite his slightly absent minded looks, he is the most articulate economist I have heard in a long time. Some excerpts. He threw a lot of light of issues generating lots of heat in the press nowadays. (Errors in figures if any is entirely mine).

Should we believe the new GDP growth rates reported

People confuse output for income. GDP is not the sum of turnover but income. A consumption good may be traded at 4-5 intermediate stages before it reaches the final consumer. Then GDP is not the summation of the turnover of the 4 intermediate trades but just the income (Value added) at each of these stages. Example: if an auto mfgr imports components of Rs 30, assembles and sells the car at Rs 55, the dealer to retail showroom at Rs 70, and the retailer to customer at Rs 80… the GDP will be Rs 50 (25+15+10) not Rs 235 (30+55+70+80) or Rs 205 (55+70+80).

Thus GDP is not summation of  Value of Outputs (VO) but summation of Value added (VA) at each stage.

GDP = ∑VA  or = ∑VO * (VA/VO). i.e output into Value Added ratio at each respective stage.

In India the long term average (1950-1998) VA ratio was 16% for manufacturing industries. Between 1998 & 2003 it increased to 18%. By 2011-15 this has increased to 22.5%. Thus a lot more value addition is taking place in our output than anytime in the past. Even if our output may not have grown at higher rates, the value added component in that output has gone up … giving higher GDP numbers. This is what is being witnessed now.

2             Typically in a downturn, industries invest in efficiency improvements rather than investments in physical assets. In Boom time they invest in physical assets (may be indiscriminately). During 2 crunch times of 1998-2003 credit squeeze and 2011-2015, India has invested and become far more efficient and is achieving higher VA in its output. We are lot more competitive globally today than 10 years back.

3             China also invested heavily in physical assets during boom years. Their VA/VO ratio was also fortunately high in mid-20s which has fallen and stands over the last decade to 19% now, less than India’s in several sectors – a sign of over investment. They are now investing in efficiencies and technologies. The World average (long term) is 18-19%. India is well placed now on cost competitiveness and more industries should identify their strengths and grow; they should not worry too much about our size being 1/5th or 1/10th of China’s in their industry.

Why corporate profitability is low in spite of higher value added

4             The VA  has 2 large components – (i) what is paid out as wages and salaries (WS) and (ii) other operating surplus(OS) (paid out as interest, dividend, retained surplus, etc.). In the last 5 years the average rate of growth in WS for India as a whole is 17% p.a. meaning far more is paid out as salaries and wages and the share of OS is 10% p.a. of which the share of interest has been high. Dividend payout has also increased dramatically affecting Corporate profitability and retained surpluses. Wages and salaries in rural India has risen faster than in urban areas/industries.

Shift in manufacturing profile

5             The share of unlisted firms is growing faster than listed companies. Unlisted firms are growing at 12% CAGR while listed firms output is growing at 7% CAGR. The share of informal sector has quietly reached 40% today.

India is becoming more entrepreneurial. It would not be surprising to see that in the next 5/10 years, the top 20 of the 40 construction companies will be totally new and unheard of now.

6             Black money distorts asset allocation.  Most of it is kept in black assets – gold and real estate. Now that there is drive against black money, real estate is suffering.

On Why IIP numbers (index of Industrial production)  don’t reflect our higher growth    

7             IIP numbers are constructed from select industries. Those mfg industries/product which contribute at least 2% of total is selected first. Some of these may have 8% some 5% and so on. 14 such products contribute 80%.

For these products/ industries, just the top 6 firms (turnover wise) are selected. Their rate of growth is taken and averaged and reported as IIP numbers. The index we are using has a base 2004.

During the last 10 years between 2004/5 and now, the small and medium scale sector in these industries have grown far faster (at 14% p.a) than the corporate sector (7% p.a) and the sample 6 have grown even slower. The share of small firms have grown from 30% to 50% in the last 10 years – a fact not captured by the index.

Construction of any index is a time consuming and costly exercise based on extensive surveys. Thats why they are not done frequently. A new series with base 2011 is in the offing, which might set right the anomaly between GDP and IIP numbers.

Why Indian industry is not investing even if it is growing

7             Informal sector which is growing the maximum does not have much savings – it is squeezed out by the money lenders – their main source of finance.

More is paid out as wages and salaries, who may not have the same investment urges as retained earnings.

and of course the High interest rates (see below)

Interest rates

8             Indian interest rates are very high. It attracts a lot of portfolio flows which come in and keeps Rupee artificially high and un-competitive. The way to correct it is to let the interest rates fall which will enable the industries to invest and absorb these flows. If the flows are properly absorbed the currency will find proper level ($ may be Rs 72/75 instead of being Rs 67-68) and portfolio flows will be moderated. This has not been allowed to happen and our real interest rates have been kept artificially high.  We are just accumulating reserves instead of putting it to productive use.

9             Indian industry is crying hoarse on high real interest rates. What they should be screaming at is the differential interest rates. Between 2008 and now these have moved significantly against India.

Our corporate interest rates were 9% average towards end of last decade when the global interest rates were 4.5 % – a gap of 4.5%. Today our interest rates are 10.5% when the global interest rates are kept at 1.5% a gap of 9%. Not an ideal situation for investments. It is better to invest overseas, even if to supply to India.

Thus Indian industry is caught between artificially high interest rates and artificially high forex rates which does not enable them to raise prices in line with costs.

Difference between Planning Commission and the current NITI AAYOG.

10           The previous planning commission had a 15 year, 5 year and 1 year plans/horizons.

15 years – There was a broad perspective plan which was not generally well known or publicized.

5 years – Better known as 5 year Plans. This was an approach paper.

1 year – laid out the expenditure for various programmes.

The NITI AAYOG has a 15, 7, 3 year cycles.

15 year. Vision document – the Government has asked the Niti Aayog to come up with this.

7 year – plans and programmes.

3 year – implementation plans for the above.


11           The current NPA is entirely that of Corporate sector. The priority sector NPAs have remained at their usual 1.5%.

12           From financing just working capital needs from retail savings our Banks are now financing long term loans from the retail savings. More than 50% of lending today is for long term loans.  This is inherent mismatch. Our commercial Banks are not just designed to deal with NPAs.

13           It is not that we were without NPAs earlier. The long term loans were earlier met by DFIs (IDBI, ICICIs, IFCIs) which financed themselves with long term Bonds (15 year types) and were far better able to deal with temporary fluctuations in business and time taken to rectify/reconstruct even bad decisions. It is simply not feasible to deal with them on a quarterly basis, which is what the banks are expected to do now.

Choice does not necessarily bring Welfare, Dr Sen.

IMG_0896.JPGWhen it comes to Cars I was a bit like Madhuri Dixit who claimed that ‘it is just a device to get me from place A to place B – nothing besides’. Yes she does look for comfort but does not care that much for looks, prestige, colour, gizmos, etc. It was the same with me … but only till recently.

My first five cars were hatchbacks from Maruti and Ford. I must have spent a total of fifteen minutes in selecting them – cumulatively that is. Initially there was no other choice as one would have had to deal with Ambassadors or ‘on the way out’ Fiats. Choice was about the colour alone.

My last car was a Toyota Altis. I was sort of told what to buy by my employer and so i went to the showroom and looked at the car for about 15-20 minutes mostly to familiarise myself with its features. The only choice was the colour and by that time i had had 3 blues, and 2 whites and so was sort of bored with those colours. I selected Grey.

Three – four days after i took possession, i happened to meet my boss at the office park. He asked me how my car was doing. I told him that i would have rather taken a Wagon R or repeated my earlier Ford Fusion (FF) both hatchbacks and comfortable to sit. FF also had a thicker gauge of metal so wasn’t really a problem with minor dashes and kisses while parking, so frequent in Delhi. He did not relish the answer at all. He said, ‘No. You should get a good car you see. It is necessary’. He seemed to convey much more than what he said. Guess he had played a part in upgrading my values to make it affordable even if I was otherwise ineligible.

That was my last psychological engagement with Altis. 5 years of trouble free running, faithful servant, i slowly got used to sedans and the low seating. I always preferred the high seating hatchbacks or SUVs. In fact SUVs are too high to get in and out and Crosses are better. I had never measured the mileage, never bothered to do up the minor scratches, my driver had to remind me to change the perfumes (in fact he only bought them), the garage fellow will tell me to change the tyres. The only thing that i did get worked up about was eternal cleanliness. Any deposit of delhi’s dust for more than a day would send my tempers up. I finished 5 years but was not really looking for a replacement when suddenly the break pads started giving loud noises, was not reliable any more while breaking. The workshop had started warning me in the last two visits over six months.

It was time to change the car. By this time i had seen some of my colleagues graduate their cars … significantly up to Audis and Mercs. I thought i should spend some time and make a properly researched, well informed, decision after comparing all available choices and not rush into any decisions or feel left behind.

So began my search. In the 3 months that followed i would have visited several garages of Honda, Hyundai, Toyata, Audi, Merc, BMW, Jaguar and Land rover, and Porsche (not that i could ever afford one… but gave me a nice feeling that i can get into their showroom), and Marutis… some at 2-3 different places. Spoken to 2-3 recent buyers of high end cars to get their take, … a close friend provided with a comprehensive comparison sheet of all such cars.

My first dream was the curvaceous Camry. Or the spacious Honda Accord. Someone who knew me well had suggested Santa Fe. I was told Accord has been withdrawn in India for sometime. Went to the Hyundai next door and had a look. Although i did 4-5 trips in the next month or so to get an additional car – i10, i was not impressed with their reception at all. Their complacency showed : there was 3-4 months waiting for most of their cars. I would have almost bought the new Creta if it was available off the shelf. But the minimum wait was 4 months. The beautiful Camry – my true infatuation – had given way to the feature rich but extremely geometric and boring design. One look and i decided that the lady had become wiser with age but not more vivacious. Toyota was also much like Hyundai … not too bothered. To get a test drive of Camry i had to visit them 3 times. Finally promised and when i reached apologised that they had only a car to show but not to drive … great customer care!

Then i started with the European/German Cars – Mercedes, BMW, Audi, Jaguars.   All great to drive and almost read your mind to drive but i was still hesitant on the value – money proposition till i talked to my friend of mine, a CEO of an Auto component MNC. Just a decisive sentence, ‘German cars are German cars. Don’t even entertain any doubts. It is the ultimate driving pleasure’. That done one more round, this time with prices included.

I asked my driver to chat up some of the other drivers and give me a feed on Audis. He came back with ‘people are saying there are issues with their service, Sir’. That more or less sealed its fate. I am surprised till date how so much information search and experience did not make up my mind in certain respects but a single minute 3rd party ‘expert’ feedback closed my mind on one of the dominant choice. About BMW i took some feedback from a friend, ‘Have no doubts my dear friend, don’t even have second thoughts’. Again that sealed by choice decisively ultimately. Regarding colour one of the many salesman i met remarked on my favourite Red, ‘Sir, its a beautiful colour no doubt, but your eyes tend to get bored with it in six months, and you tend to get sick with it’. That more or less sealed the colour choice for me. Mercs showroom was staid and somewhat non caring i thought and there was no sense of urgency about them. In any case the back seat width in most of their models is too narrow – I can barely place my bums, i thought.

The car arrived and it was looking gorgeous in my garage slot. Two more than middle aged business ladies who live in the same building and have never spoken to me in the past 10 years came and complimented me on the new car especially the colour. And so did some drivers in our office with some well meaning gratuitous advice on how to take care of it, etc.

After 3-4 days of gloating over it, the discomfort of getting in and out of low seating sedans was beginning to singe. I am most comfortable placing my foot flat on the floor of the car… but then the low seats don’t allow that unless you have your knees almost level with your chin. You have to stretch your feet if in front seat. Without anything to rest my foot firmly, i felt that any sudden breaks i would slide down my seat and the discomfort of resting the weight of my foot on the heels of my shoes…

To incentivise, I had told my driver that the new car is expensive and every scratch will cost me a bomb and if at the end of the year there is no scratch on the car he will get one month’s additional bonus. He is not exactly race track ready but i have never had any issues: he is as fast as any ‘stick to your lane’ driver can be. But nowadays he is a unsure wreck – looking in 32 directions every now and then before he pushes ahead.

My Ford Fusion was a bully – with its thick gauge i was not afraid of the autos, or two wheelers or other cars. I would just nose my way in, honk and elbow out others and create my way. These days when i am at the wheel, i am afraid of every auto, speeding car… motor cycles and even cycle rickshaws, nervous that they may come and kiss my vehicle… DTC busses are a menace …and in general the lower the value of the other nearby vehicle the more my scare. I have caught the virus of looking over, ahead, sideways, rear view mirror… from my driver.

And a few days into my purchase, my car was stuck somewhere and i had taken a ride with a colleague on his Ciaz. A high seating sedan, I could firmly root my foot, there was all the electronics one could think of… the rear cameras, navigation, voice recognition … big boot space with Stepney properly hidden… it appeared a superset of all features I had noticed in all other cars. All at 1/4th the price… cheap price the thing that makes most Indian mouths water the most. And my sense of regret was complete.


  1. i want to convey I have bought a ‘luxury’ (according to me) car and arrived in life. (Even if i didn’t say this, most readers would have concluded anyway that it is the only purpose of this article. So why should not i get the pleasure of saying it myself instead of starting with being defensive).
  2. Choice does not necessarily bring welfare, Dr Amartya Sen. You got it wrong. Some of the most happy people i have seen, come from the poorer communities, nations, neighbourhoods, families… wherever there is a sense of brotherhood, trust, stability of things, relatively stable balance of things with others/neighbours/colleagues including income and wealth, etc. (I don’t want to include ‘success’ in that category and contaminate the rest. It seems to be a bigger pollutant of happiness than wealth).
  3. I think the more the choice of goods available and we see them all and analyse each and every feature (obviously no single thing that offers all that everyone desires) the mind constructs a super set of all features at the same measly price i paid and starts suffering in comparison. Absence of choice may not have led me to these desires in the first place. I don’t know if Einstein, Chaplin or Rockfeller or Russian Czars would have ever regretted that they didn’t have the latest iPhone or Jaguars or such like. It seems so simple: ‘what the eyes don’t see… the hearts don’t grieve’.
  4. Mostly objects seem to have some high ‘utility value’ so long as they are not in our hands and the moment it comes into our grasp (or after the first use) its utility seems to plunge so steeply. The fall seems inevitable …only the rate depends … so perhaps the saying ‘a satisfied desire can never be a good motivator’. So we see divorces after 56 hours, 56 days or 8 months… objects bought with so much urgency or passion etc lying unused in our cupboards or show cases for long un-opened, books lying unread, etc.
  5. Lets not get things mixed up. There is nothing wrong with the vehicle. It has delivered almost on all parameters it claimed. 17 km per litre is a steal on diesel … it is less than ½ the cost of travel by auto for similar distances. It packs the power of a well built mid-fielder and has the languorous grace of a David Gower or Lionel Messi. At normal speeds it stalks like a tiger on the prowl and when required it lunges forward at will like a feline hunter which has decided on its particular kill. So overtakes and high speeds are not a problem if you have the stomach.
  6. It is more my core need which is to be seated with knees bent like when you are seated on your dining chair or office chair. It is the most comfortable position for me and that’s what my previous cars have ensured. When the seating gets low and i bend my knees only half, it is uncomfortable, although i gather low seating makes for a lot better stability and balance on highways and on turning. Once this is compromised i think our psyche starts screaming which only grows with time on you. All other benefits and conveniences features and comforts meekly surrender before it. I am sure the core may be different for different individuals. Unfortunately quite often i am not able to figure out what the core is exactly before the inevitable or irreversible decision or event or purchase and use.
  7. When i see Audi SUVs these days, the mind starts wandering … would it not have been a better choice…the comfort of high seating… being able to put my foot down firmly flatly, … so what if they had put a lower engine (same as in Skodas and VWs), I am not going to be racing; so what if the service is bad, the car is not going to be in the garage every day; should i have blindly relied on the Driver’s advice, shouldn’t i have thought about it myself… my mind has now to fight every reason it used to reject it in the first place.
  8. Oh! Come on. ‘But then the Audi’s front grill looks like the smile of a lady without her two front upper teeth, grinning from ear to ear. However beautiful the face, the smile – the ultimate embellishment/jewel on a human face, on such a face always looks horrible’ this is my ego defending my action. My ego the only true friend i have … never ditches me… always springs to my defence unlike my friends, wife, siblings, teachers, relatives, colleagues, et al who all ditch me for logic (the stupid logic) sometime or the other, sooner or later. Even if i were to commit a murder one day, i am sure it will still stay thick with me and be a judge who always rules in my favour.
  9. There is the core need and there are the peripherals. I think the speed and levels of satiation, frustration or disgust or boredom depends perhaps on how far out from the core the peripheral need is. With some core needs may be satiation perhaps never sets in or sets in ever so slowly like a biological process.

Finally, with all this wisdom i am still not sure if i will get my next decision right the first time. Should i have researched more. Perhaps yes. But then more knowledge is what seems to have led to dissatisfaction, discomfort and regret in the first place … so what will it achieve but the opposite. May be lack of choice leads to more happiness … but i am not sure if i am there yet. But it looks like the absence of too much external stimuli and temptations by way of alternatives enables me to discover and stay close to my core need. Or discover myself better. If true i pity the rich… poor souls!