It's Time to Include the Informal Economy in Measuring GDP

Raghuram Rajan has been talking about how the GDP gets distorted, but he could lead the conversation about making it more representative and inclusive

Raghuram Rajan. Credit: IMF/Flickr CC 2.0

Raghuram Rajan. Credit: IMF/Flickr CC 2.0

Raghuram Rajan, governor of the Reserve Bank of India, inspires me to coin the term ‘Rajanspeak’ following the trend of using smart language.

Now and again in different forums Rajan lets drop remarks that blitz through the media and through the minds of those who are interested in public policy, especially in the field of economic policy. When he was smartly arguing or trying to argue against the pressure that he was facing both from the Government and the corporate sector to lower the interest rate, instead of directly confronting the players — especially the corporates  — he turned the conversation around by talking about small savers and big spenders. He drew attention to the fact that lowering the interest rates would be a disincentive to the small saver. And that the big cats are “bad” spenders, i.e. they get into debts and are the worst savers. Further, he mentioned an important fact that many of us have been pushing forward, namely that it is these small savers who provide the  highest proportion of India’s domestic savings. 

However he was also quick  to agree that lowering the interest rates would be enabling for the SMEs (small and medium enterprises), though more recently he seems to be supporting a more focused, more wholesome approach to encourage SMEs . At a lecture in New Delhi, on Janyary 29, in honour of C D Deshmukh,  he put forward this approach, that is, to do some home work with the SMEs and build their capability to take loans and succeed . He referred to the SHGs (self help groups) as a model.

The latest pataka that he has burst is joking about the sometimes misleading calculations that enter into summating the GDP. (The two housewives story – two housewives are caring for their households . Then they switch locations and each goes to the other ‘s household and does the same work. This would monetize their work , and show an increase in GDP , even though there is no real “increase “.  This illustration would not go down very well with feminists who are arguing for monetizing unpaid house work  and care work ). 

GDP is the international measure

Even if it does have these ‘errors’, GDP is now an international idea/measure and it has its own voice. The goddess of GDP has been challenged over several decades, but in my view the winner remains the goddess.

Much work has been done and continues to be done, on alternative indicators the most famous being the Human Development Index, pioneered by Dr. Mahbub ul Haq. This was followed by the ‘Commission on the Measurement of Economic Performance and Social Progress’ set up by former President of France, Nicolas Sarkozy with eminent economists like Joseph Stiglitz (who chaired the commission) and Amartya Sen. Then there is the famous Bhutanese invention, GNH (Gross National Happiness)

A group of mischievous indicator-wallahs, Clifford Cobb, Ted Halstead, and Jonathan Rowe wrote in an article in “The Atlantic monthly ” in 1995. “If the GDP is Up, Why is America Down?”

“…the GDP and its various proxies — rates of growth, expansion, and recovery — have become the very language of the nation’s economic reportage and debate. We literally cannot think about economics without them. Yet these terms have increasingly become a barricade of abstraction that separates us from economic reality. They tell us next to nothing about what is actually going on.

“GDP is simply a gross measure of market activity, of money changing hands. It makes no distinction whatsoever between the desirable and the undesirable, or costs and gains. On top of that, it looks only at the portion of reality that economists choose to acknowledge–the part involved in monetary transactions. The crucial economic functions performed in the household and volunteer sectors go entirely unreckoned. As a result the GDP not only masks the breakdown of the social structure and the natural habitat upon which the economy–and life itself–ultimately depend; worse, it actually portrays such breakdown as economic gain.”

However, while it is reasonable to argue that rate of growth of GDP is a number that cannot be shifted, a little disturbance within countries, within states, even within lower geographical units, to correct misleading calculations can enable the design of effective programmes and policies. And illustrative jokes by Rajan, can budge the systems and dampen the over powering allure of competing for GDP growth rates .

Neelkanth Misra , of Credit Suisse , mocks at the overall perception that “corporate “ India is the mover and shaker of the Indian economy .

Hidden growth

In an article “The hidden growth”, Mishra refers to the Economic Census according to which, India had 42 million enterprises in 2005 while it had less than a million companies. He writes, …Ninety per cent workforce is engaged in the informal economy (that is, not in companies). About half of India’s GDP is informal (that is, not generated by incorporated enterprises)…productivity growth has been the most dramatic in the informal side of the economy.”

But if half of the GDP and 90 per cent of India’s workforce are seeing such dramatic changes, why is this not reflected in GDP growth? This doesn’t show up in the current GDP statistics because we don’t measure it, says Misra.

“From 1999 to 2009, 75% of all new factories came up in rural India, and 70% of all manufacturing jobs were created there. This should not be surprising, given that there is so little physical space available in cities: on average rural factories deploy more capital and also employ more people. The average employee count of these 42 million enterprises was 2.4 per unit. The Spread of the mobile phone and other technologies of communication have led to not only enormous increase in small enterprises, but a matching demand by those new incomes for goods and services, at often local levels, spurring each other linking the demand to the supply”, he continues. India’s informal GDP, i.e., economic activity by unincorporated enterprises, is half of total GDP, among the highest ratios in the world and comparable to sub-Saharan Africa.”

It will be enabling in building a more just, and perhaps a stronger economy in India, if Rajan would nudge some of these ideas a little more into economic reasoning at the highest levels, moving from jokes and asides to argument. As Rajanspeak goes into blitz mode, it might budge the commitment to the current engines of growth, moving it into supporting what can be called ‘the real engines of growth,’ namely the various economic fast growing entities at the lower end of the economy – and the kind of labour force that supports it .

Devaki Jain is an economist