# Budget 2023-24: Do you know what growth rate actually implies?

It is common to find some concepts that get undue importance in academic and general discussions for unknown reasons. One such concept is growth rate.

For instance, if the overall growth rate of an economy declines from 5 per cent to 4 per cent, then the opposition parties come down heavily on the government for its failure to manage the economy. Does it make a big difference to a person in the street if the growth rate slides down from 5 to 4 per cent?

If the decline in the economy’s growth rate is mainly because of a dip in the output of the automobile industry, then how will it affect the daily life of a layman? In such a case, the criticism of the opposition parties is unjustified.

On the other hand, if the economy’s growth rate increases from 5-6 per cent, the ruling party takes the credit for it and makes claims of its schemes yielding fruits.

If the increase in the growth rate is mainly due to a better export market for automobiles, then it will not make much difference in the lives of the general public. In such cases, the government’s claim appears to be unjustified.

Irrespective of changes in growth rate, the public will be happy if they get their goods for consumption at reasonable prices. Therefore, hurriedly jumping to conclusions based on limited data is not advisable. A deeper analysis is needed to make the right judgement.

Professor Gautam Mathur, an eminent development economist at Osmania University, holds an unconventional view of the overall growth rate concept. He looks at it from the angle of basic goods. Basic goods are those goods which directly or indirectly lead to the production of all other goods. Therefore, basic goods are the most important driver of economic development.

If an economy consists of three basic goods — A, B and C, growing at 8, 7 and 6 per cent, respectively — then there would be a general perception that the overall growth rate of the economy would be 7 per cent.

This is not true; a deeper analysis reveals that this is not possible as one of the basic goods is growing at only 6 per cent. In this case, the growth of the economy is constrained by the growth rate of C.

Therefore, the overall growth rate of the economy will be only 6 per cent and not 7 per cent. In such a situation, some amount of A and B will remain untapped. In an interdependent system, the growth rate of the slowest-growing good will determine the economy’s overall growth rate.

Some aspects of the concept of growth rate deserve some discussion. Mainly three types of growth rates, in general, are used to measure the growth rate of a variable: Simple growth rate, compound growth rate and exponential growth rate. The estimates of these three growth rates will be different for the same data.

For a given data, the simple growth rate will be greater than the compound growth rate, which, in turn, will be greater than the exponential growth rate.

Depending on the nature of the growth process, one has to decide on the type of growth rate to be used. Often, either out of ignorance or for the ease of computation, one may use a simple growth rate.

Sometimes, those who analyse the growth rate may have a vested interest in projecting a particular point of view. If they want to depict the economy’s performance to be poor, then they may use exponential growth rate.

Sometimes they deliberately or, for other reasons, do not specify the type of growth rate used and keep the readers in the dark.

Another important issue that deserves attention (but is often ignored) is the selection of the two points of time for measuring the growth rate of a variable during a given period.

Also read: How green is Union Budget 2022-23?

The production of food grains during the past few decades, for instance, exhibited an upward trend with some fluctuations.

Suppose one compares the production in the current year with the production of a year which recorded bumper production due to favourable weather conditions. In that case, the growth rate will be insignificant.

On the other hand, if one compares the current year’s production with the production of a year with a slump in production, then the growth rate will be impressive.

Therefore, to get a realistic picture of the growth, it is better to take an average of the three years around the initial year and that of the terminal year.

For instance, if one is interested in finding the growth rate of foodgrains from 2014-15 to 2020-21. First, the average production of the years 2013-14, 2014-15 and 2015-16 has to be computed.

In the next step, the average production of the years 2019-20, 2020-21 and 2021-22 has to be computed. Finally, using these two averages, the growth rate for the required period has to be computed.

Before arriving at conclusions regarding growth, one has to be really aware of the factors and variables that determine the growth curve.

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*Views expressed are the authors’ own and don’t necessarily reflect those of* Down To Earth