India's GDP Trends

So, I recently downloaded all this GDP and other macro data from the RBI’s database on the Indian economy (http://dbie.rbi.org.in), and I can hardly contain my excitement. My mind is like the inside of a fat water balloon – it is literally “bursting” with ideas for posts!

But since I’m an adult, I’m going to restrain myself and go step by step. I will do a series of posts based on this data. Today, I’m going to present and analyze trends in India’s Gross Domestic Product (GDP) all the way back from the 1960s.

GDP Trends  

I’ve created below a chart of economy-wide y-y GDP growth over the last 50+ years. The growth rates charted here are those of GDP at Factor Cost, at constant prices (04-05 base year). What does that mean?

• “GDP at factor cost” = GDP at market prices – Indirect taxes + Subsidies. It is a measure of GDP that excludes net indirect taxes paid to the government (these are taxes paid on good and services, and not on personal incomes). Since indirect taxes and subsidies are “transfer” payments (i.e. no output is created or economic value added in such transactions), it makes sense to exclude them while measuring GDP growth.

• “GDP at constant prices” is calculated using prices of products/services in a chosen base year (04-05 in this case), as opposed to GDP at current prices, which is calculated using prices of goods/services prevailing in the current year. GDP at constant prices allows us to measure “real” GDP growth i.e. growth due to expansion in output (and not just inflation) since prices are held constant.

Below are the key trends and analyses extracted from this data:

• Annual GDP growth rates of the 2000s three times more stable (less volatile) vs. those of the 1960s. 

The chart above shows that GDP growth was significantly more volatile in the '60s and '70s, than it has been in later years. GDP growth rates have become more stable (less volatile) and predictable over the decades. For the mathematically inclined (nerds like me), I’ve calculated below the arithmetic mean of y-y GDP growth rates in each decade, as well as their Standard Deviation (from the mean).

What is Standard Deviation you ask? Standard Deviation (σ or SD) is simply a measure of how spread out numbers in a population are around the population mean.

Look at the third column in the table above. It shows that in the 1960s, SD/Mean was = 93%, which means that on an average, yearly growth rates lay almost “1 mean distance” away from the population mean of 4%. In the ’90s, this distance was “0.34 mean”, while in the 2000s, it was “0.30 mean”. These numbers clearly indicate that growth has become much more stable. Infact, GDP growth rates in the 2000s were 3x more stable (less volatile) vs. the 1960s [SD/Mean of 2000s (30%) =1/3rd SD/Mean of 1960s (93%)].

• Why has GDP growth become more stable and predictable, you ask? It’s because Agriculture, the sector exhibiting the most volatility in y-y growth, now comprises just 14% of real GDP vs. 48% in 1960. Services, which exhibits the least volatility, now comprises 67% of real GDP vs. 37% in 1960.

There are three key sectors in our economy (any economy really) – Agriculture, Industry and Services. The Indian Agriculture sector has always been the most volatile in terms of GDP growth because it is heavily dependent on the monsoon for irrigation. 

In the table below, I’ve calculated the mean & SD of y-y sectoral GDP growth rates for the period 2000-01 to 2013-14. The SD for the agriculture sector is 1.3x the mean! Kind of defeats the purpose of calculating a mean, huh? Services growth is the most stable (SD = 0.22x mean).

Given that the agriculture sector is now (2013-14 estimates) just 14% of real GDP vs. 48% in 1960, and Services comprises 67% of GDP vs. 37% in 1960, GDP growth today is much more stable and predictable.

• Average y-y GDP growth has been accelerating over the decades (3.2% in the 1960s to 7.2% in the 2000s). The answer lies again in sectoral composition --> in the rising share (67% of GDP today vs. 37% in 1960) of the services sector where growth has been accelerating; and the falling share (14% today vs. 48% in 1960) of the volatile and low (avg.) growth agriculture sector. Industry has exhibited a modest though patchy/inconsistent acceleration in growth (19% of GDP today vs. 14% in 1960). See chart below and pie charts above.

• How does India’s GDP growth compare with other nations? For the period 2006-14, India’s GDP has grown at an average 7.5% y-y vs. just 1-1.5% growth for the major developed nations (USA, UK and Germany) and 3-3.5% for the emerging economies of Russia and Brazil. China has grown at a scorching 9.9%. That said, growth has slowed down in China this year and it faces many challenges as it looks ahead.

India though well positioned for now, has challenges of it’s own (subject for another post). I’m going to talk about Sectoral GDP trends in detail in our next post. Ciao for now!