RBI governor Raghuram Rajan makes case for relook at new GDP methodology

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MUMBAI: Raising doubts over the new GDP growth rate methodology, RBI Governor Raghuram Rajan today said there is a need for better computation of numbers so as to avoid overlaps and capture the net gains to the economy.

“There are problems with the way we count GDP which is why we need to be careful sometimes just talking about growth,” Rajan told the students of the RBI-promoted Indira Gandhi Institute of Development Research.

In his convocation address, citing the example of two mothers who babysit each other’s kids, he said there is a rise in economic activity as each pays the other, but the net effect on the economy is questionable.

“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,” he said.

The academic-turned-central banker further said that there are many suggestions from various quarters on the ways to calculate GDP in a better way and we should take those seriously.

Some analysts have questioned the new GDP computation methodology, which has been in effect for a year. The critics point to the divergence in the mood between GDP data and other indicators like factory output to question the veracity of the new series.

Also, the new GDP methodology has seen for the first time the economy growing at lower in nominal terms than in real terms at the factor-cost effective 2005. In the second quarter of the current fiscal, the real GDP clipped at 7.4 per cent, while the nominal GDP grew much lower at 6 per cent.

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