Are India's GDP figures misleading? What RBI governor Rajan said

When RBI governor Raghuram Rajan sounded sceptical on our GDP methodology he was effectively questioning the foundation on which we claim we are the 'fastest growing economy.'

Addressing an event of the RBI-promoted Indira Gandhi Institute of Development Research, Rajan said: There are problems with the way we count GDP, which is why we need to be careful sometimes just talking about growth."

Here's a quick explainer on why he, and many other economists, do not fully trust the way we arrive at our GDP figures

1)Last year the Centre introduced a new method to count the GDP based on Gross Value Added (GVA) method replacing the one based on factor cost. The new formula takes into account market prices paid by consumers( adding GDP at factor price and indirect taxes- subsidies).Central Statistical Organisation which computes GDP says this is as per international practices

2) The base year was changed from 2004-05 to 2011-12. It is standard practice to change the base year periodically so that it takes into account new sectors.

3) For the fiscal 2015, the country’s GDP jumped to 7.3% from 5.5% under the old method.

3) Critics point out that this is not reflected in other indicators like factory output, bank credit growth, jobs and consumer demand

4) Rajan said what we need to keep in mind is the net effect on the economy.He said, "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."

5) Rajan gave the example of two mothers who babysit each other's child and then pay each other. "There is a rise in economic activity as each pays the other, but the net effect on the economy is questionable,"the RBI governor said.

6)Some point out that Rajan was not questioning the new methodology but merely putting it in context.