Raghuram Rajan Questions New GDP Formula

Reserve Bank Governor Raghuram Rajan on Thursday said the country needs a better methodology to capture growth measured in terms of gross domestic product (GDP). There is a need for better computation of numbers to avoid overlaps and capture the net gains to the economy, he said.

"There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth," Dr Rajan said.

The new formula to calculate growth, based on market prices, shows India is the fastest-growing major economy in the world. Critics say the headline growth rates appear strong because of change in statistical methods that seek to capture more evidence of economic activity.

Other barometers such as bank credit growth, jobs and consumer demand paint a less healthy picture, analysts say.

Speaking to students at the Indira Gandhi Institute of Development Research, Dr Rajan said, "We have to be a little careful about how we count GDP because sometimes we get growth because of people moving into different areas. It is important that when they move into newer areas, they are doing something which is adding value.

We do lose some, we gain some and what is the net, let us be careful about how we count that."

There are many suggestions from various quarters on the ways to calculate GDP in a better way and we should take those seriously, Dr Rajan noted.

According to the new GDP methodology, the economy is growing at slower pace in nominal terms than in real terms for the first time. In the September quarter, the real GDP clipped at 7.4 per cent, while the nominal GDP grew much lower at 6 per cent.

Dr Rajan also spoke about the need to focus on employment creation and took a middle line to say that policies need to be geared up to face the onslaught of technological innovations.

"We have to make sure that our policies are geared up such that we will create the appropriate playing field to find new jobs. We should not create a distorted playing field where at the end of the day the wrong kinds of jobs emerge," he said.