Higher growth numbers are OK, but Modi govt needs to understand Okun's law

On 12 May, the Union government launched a new series to report industrial production in the country, represented by the Index for Industrial Production (IIP).

Under the new series (2011-12), the average annual IIP growth in the last three financial years, under Narendra Modi's premiership, comes to 4.1% per cent, significantly higher than 1.96% reported under the previous series, which was based on the 2004-05 base year.

However, the change in the base year to calculate IIP by the government has made the IIP growth numbers for 2012-13 and 2013-14 rise to 3.35, as against a meagre 0.5% under the old series.

So, knowingly or unknowingly, in a bid to make itself look good, the Modi government has made the UPA government's economic policies look pretty good as well.

In January 2015, a similar exercise of revising the base year to calculate India's GDP growth increased India's 2013-14 GDP growth from 4.7% to 6.9%. The 2012-13 growth estimate was revised from 4.5% to 5.1%.

Not a great reference point

The point of this article is not to suggest that the Modi government is creating a better image for its predecessor.

Moreover, changing base years for calculating growth in GDP, IIP and other economic indicators is a regular exercise.

Rather, the argument to be made here is that in times like these, growth in GDP or IIP numbers cannot be taken as a reference point for growth in the country.

The better GDP and IIP numbers, for example, are unlikely to help India get better credit ratings from international ratings agencies. Ratings agencies like Fitch have already said they are more concerned about India's general fiscal deficit (Centre plus states), government debt and the state of the Indian banking system, which has a gross-non performing asset ratio of 9.1% of its total advances.

The dismal job situation

Nor would these rosier growth numbers change the employment scenario in the country, which is at an abysmally low level.

With around 13 million people entering the job market every year in India, both Modi's and Manmohan Singh's governments records are dismal when it comes to job creation. Since 2012, the number of jobs created in eight labour intensive sectors has not been more than five lakh per year.

If we go by the prognosis for the IT sector for the next two years, which is not the part of the eight labour intensive sectors, there would be around two lakh job losses for software engineers.

No government in the world has been able to sustain a jobless growth for a long period of time.

Okun's law

Okun's law captures the relationship between a country's unemployment rate and its negative impact on the country's GDP or GNP.

The 'gap version' of Okun's law states that for every 1% increase in the unemployment rate, a country's GDP will be roughly 2% lower than its potential GDP.

While the law named after economist Arthur Melvin Okun is based on the author's research on the American economy in the 1960s, it has been accepted worldwide, with minor changes in its application.

Given that India does not have reliable job data and even the numbers reported by the labour bureau are based on its survey of around 10,000 labour intensive units, it is accepted that unemployment in India is at a five-year high.

The government has been talking about collecting more reliable unemployment data in the country, but it is not sure by when the country will have comprehensive data on the actual rate of unemployment.

Therefore, in the meantime, India will have to go by the employment generation data provided by the government, and see it in the context of how many people enter the job market every year in the country.

The figure, definitely does not paint a rosy picture for either the erstwhile UPA government or the incumbent NDA government.

What the Modi government must keep in mind before making any tall claims on the well being of the economy based on methodology change exercises in the future is that without net job creation, growth in GDP cannot be sustained at high levels, no matter what the database used for calculations is.