HindustanTimes Thu,23 Oct 2014

India’s lower GDP growth is good news for some

Dhirendra Kumar , Hindustan Times  New Delhi, February 02, 2014
First Published: 23:11 IST(2/2/2014) | Last Updated: 23:14 IST(2/2/2014)

By some twisted logic, news about lower economic growth in recent years is being presented as something positive.

Can a lower gross domestic product (GDP) for the country be good news? Apparently, in India it is. At least if you abandon common sense and use only a strange sort of twisted logic. Last week, the government released updated data on the Indian economy’s growth over the past few years. The news was mostly bad, since it has been found that the GDP grew by 4.5% in the year 2012-13, and not the 5% that we’d been told earlier. While this is bad news but frankly, at this stage it isn’t really news.

However, there was a view, expressed in the media not only by media commentators but also by unnamed senior government functionaries quoted in news reports, that this was actually good news. Why? Because a lower GDP base for 2012-13 would mean that this year the growth is actually higher! Consider the logic. Let’s say the economic output in 2012-13 was thought to be 100. This year (2013-14), it’s expected to be 104.5, so the growth will be 4.5%. When the new data came out, it was discovered that in 2012-13, the output was actually not 100, but only 99.5.

So now the growth over last year probably won’t be 4.5%, it will be 5%. Apparently, this is good news. Mind you, the only change is that taking both the years together, the country’s total economic output has been found to be lower. However, the twisted logic seems to be that the goal is to not for the economy to generate more, but for the government to be able to report a higher percentage growth! And the easiest way of doing this is to adjust the base on which the percentage is calculated.

In recent times, one finds that such spurious logic is often applied whenever inflation or economic growth is discussed. However, these ‘base effect’ shenanigans are just arithmetic artifacts.

In behavioural economics, there is something called the ‘base rate fallacy’. Perhaps a base effect fallacy should also be added to better understand news about the Indian economy.

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