The problems of measuring GDP: India’s informal economy

 The issue of measuring economic activity - and hence GDP - is a really great topic to dig into. Here’s an extra link from the Economist, which notes that if activity in informal industries and rural areas were properly measured, India’s GDP would look bigger and more stable, and the present slump less severe.

According to the article, India’s villages and towns are in a period of rapid economic growth. Over the past decade new roads have been built. Almost everybody these days has a mobile phone. Electricity has become more common, as have computerised land records. Fewer people have to spend time collecting firewood, using bottled gas instead. New houses built with walls and floors of brick or cement are more durable than wooden huts, and need less maintenance. All this is a massive boost to potential economic output.

It means people can turn their energy to starting businesses and escaping subsistence farming. Poultry production is booming, as it has become easier to get chickens to market. Villagers eat more processed food, made in small factories in nearby towns. Better communications are vital. Here’s a good bit of evidence: compare two villages 15 kilometres apart, near the city of Bhopal in central India. One has been connected to the road network since 2009. The other just has a dirt track. In the first, land prices are three times higher, wages are 50% higher, and far more people commute and engage in market gardening.

Yet statisticians struggle to capture the change. Measuring an economy in which the informal sector generates half of output and over nine-tenths of jobs is a tough task. A bigger economy is good news, but it raises two questions:

• First, is the informal economy robust and sustainable?
• Secondly, how swiftly can India can bring its informal economy onto a more formal footing? Informality imposes costs. Few people pay tax, hurting the public finances. Because so many people rely on moneylenders to borrow, and gold to save, the central bank has little control over swathes of the economy, making it harder to fight inflation. Meanwhile, tiny informal firms, however perky, lack economies of scale. It limits their potential.