Wrong Estimation of Gross Domestic Product

Business National

According to Ajcon Global, the average growth rate of the Gross Domestic Product (GDP) of India is 7.3 percent.

By Praveena P.

Bangalore, March 7, 2019.

The calculation of Gross Domestic Product (GDP) in India, or even the world, is not fully accurate, since there are numerous factors involved that result in the wrong estimation of GDP. Investopedia, a website for business information, defines GDP as the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

Some of the reasons behind the incorrect estimation of GDP are the existence of black money, double counting, and omission of certain services in GDP.

Black money is defined by Investopedia as money earned through  illegal activity controlled by country regulations, and that is not taxed. Black money cannot be estimated accurately, since most of the economic activities that contribute to black money are done underground and  off-the-record.

Investopedia states that some of the economic activities that help in the generation of black money are drug trafficking, weapons trading, terrorism, prostitution, selling counterfeit or stolen goods such as credit cards, or selling pirated versions of copyrighted items – such as software and musical recordings. These are not included in GDP.

“One of the solutions that worked temporarily to solve the problem of black money was demonetization. When the Rs. 1,000 and Rs. 500 notes were declared obsolete, this move  helped since most underground activities trade in liquid cash and in Rs. 1,000 and Rs. 500 notes,” said businessman  Senthil Murugan.

But the problem with demonetization was that it also brought down the trade activities in India, since a lot of businesses went into loss and had to be shut down after demonetization.

The next issue is double-counting. Thisrefers to the valuation of a product twice. For example, if a car parts-manufacturing industry shows its output based on the number of car-parts produced in a year, this is accounted for in the GDP. Next, these car-parts go to the assembling industry where they are put together and sold.

This is also considered in the GDP, but as the output of the assembling industry. So, the same car-parts are valued twice under different categories. This leads to incorrect estimation of the GDP.

There are certain goods and services that are omitted in the calculation of GDP. They are sale of used goods (second-hand goods), and transfer payments made by the government. There are three methods used to calculate GDP. They are the expenditure method, the output method, and the income method.

According to Statista, a website that provides statistics for different topics, the GDP of India in 2017-2018 was $2,602.31 billion. As per Ajcon Global, the average growth rate of the GDP of India is 7.3 percent (See graph below)


Credit: Statista

The data shows that the GDP has steadily increased over the past four years due to a probable increase in various trade activities.

Research done by the Symbiosis Centre for Management Studies in Pune states that there are three components in the calculation of GDP, they are the manufacturing sector, industrial sector, and service sector. Earlier, the manufacturing sector had the highest output, but over the years, there has been a shift in the output. As of now, it is the service sector that contributes the most to the GDP.

Experts say, “Only if black money is completely out of picture, and goods are estimated once as a finished good instead of being valued twice, the GDP may be estimated better. But this is a difficult feat to achieve.”