More care needed while counting GDP: Rajan

Reserve Bank of India (RBI) Governor Raghuram Rajan on Thursday said counting of economic growth numbers needed more fine-tuning as it does not always adequately capture the net value addition.

“There are some problems the way we count our GDP (gross domestic product), which is why we have to be careful sometimes,” Rajan said at the convocation of the Indira Gandhi Institute of Development Research (IGIDR) here on Thursday.

“We will have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It’s important that when they move into different areas, they are actually doing something which is more value added. We do lose some, gain some, what is the net,” Rajan said in his address.

How GDP is calculated is a point of debate among scholars. The new GDP series calculation propelled India’s growth rate to 7.3 per cent for 2014-15, which many critics debated. According to the new formula, the value of the output, rather than the number of units produced, were aggregated to get to the final measure of goods produced.

“Let’s be careful about how we count and obviously lots of people have thought how to improve our counting of GDP and that is something that we will have to think about as we go forward,” Rajan said.

The RBI governor praised the newly launched Startup India programme that ensures new businesses are exempted from inspection for the first three years.

“We need protection from the inspectors. Let it get off the ground before we inspect it. After all, how much harm it can cause in two-three years,” he said.

Economist Pranab Bardhan, professor of graduate school at the Department of Economics, University of California, Berkeley, who was the guest of honour for the convocation, stressed on the need to bring down capital subsidy for industries and instead invest more in the social sectors, and labour force development.

Reiterating Bardhan’s take on the issue, Rajan said effective training of the labour force was the need of the hour for the country, even as capital subsidy should be abolished.

“Perhaps we should move the subsidies away from capital subsidies. We subsidise capital in so many ways, apart from direct tax benefits for investments, we also give subvention in loans, which subsidise capital. We may do a similar thing for labour. And clearly trying to incentivise the employment of labour, especially employment that adds skills to the labour, is extremely important,” Rajan said.

The RBI governor did not take questions on the sidelines, just a few days ahead of the monetary policy scheduled on February 2.