The RBI Governor expresses confidence in India’s GDP growth, suggesting that it may exceed 7% this year[source]. However, the Wall Street Journal presents a contrasting view, reporting that India’s GDP has grown by 6.1% due to robust domestic demand[source]. The question arises as to which source should be trusted – the government, potentially seen as influenced by political interests, or the independent group represented by the Wall Street Journal. Even if the economy is moving at a 6.1% pacing rate, it is benefitting the citizens it caters to?
In this article, we will delve into the significant impact of increasing the Gross Domestic Product (GDP) on the income of the common man. We aim to provide an insightful analysis of the relationship between GDP growth and individual earnings, highlighting the tangible benefits that arise from a thriving economy. As an esteemed source of information, we endeavor to present a comprehensive understanding of the subject matter, allowing readers to gain valuable insights into the positive and negative aspects associated with rising GDP.
An increase in GDP indicates a country’s economic health. It should lead to job creation, and higher consumer spending, and encourages investment and entrepreneurship, benefiting the common man. or does it?
With an increasing GDP, governments often have more resources at their disposal to invest in social welfare programs. These initiatives mainly aim to uplift the marginalized sections of society, improve access to quality education and healthcare, and provide financial support to those in need. The implementation of such programs should further enhance the overall well-being and income potential of the common man. In this article, we test this hypothesis by using a causality test on the publically available data from the world bank.
The Myth of GDP directly linked to Common Man’s Income
While it is essential to acknowledge different perspectives, it is important to address the disconnect between GDP growth and individual incomes. Critics argue that GDP growth primarily benefits the affluent and does not trickle down to the common man. However, empirical analysis using the Toda-Yamamoto GC test provides insights into the relationship between GDP and various indicators, shedding light on their interplay.
The Toda-Yamamoto GC test was conducted to examine the relationship between each indicator and GDP, GDP per capita, and the growth rate of GDP. The test results indicate the p-values associated with each indicator’s relationship with GDP and its derivatives. By analyzing these p-values, we can better understand the statistical significance of the relationships between the indicators and economic growth.
The GC tests for GDP growth rate (GDP_pct_change) against GDP yield a p-value of 0.936, indicating that there is no significant relationship between the two variables. Similarly, the relationships between inflation, consumption, exports, imports, gross capital formation, and GDP do not demonstrate statistically significant results, with p-values ranging from 0.079 to 0.935.
However, it is noteworthy that only government spending exhibits a more significant relationship with GDP, with a p-value of 0.033. This suggests that government spending has a closer association with GDP growth compared to other indicators.
When examining the relationship between each indicator and GDP per capita, the GC test reveals that GDP, inflation, consumption, exports, imports, and gross capital formation do not exhibit statistically significant relationships with GDP per capita, as their p-values range from 0.115 to 0.985. Notably, government spending demonstrates a stronger relationship, with a p-value of 0.030.
Furthermore, the GC tests for each indicator against the growth rate of GDP indicate that inflation, government spending, and imports exhibit statistically significant relationships, with p-values of 0.018, 0.049, and 0.001, respectively. The other indicators, including GDP, do not demonstrate significant relationships with the growth rate of GDP, as their p-values range from 0.118 to 0.977.
Interpreting the Test Results
The test results suggest that while some indicators may not exhibit statistically significant relationships with GDP or its derivatives, it is crucial to consider the broader context and the multifaceted nature of economic growth. It is evident that immediate income gains are not aligning with GDP growth, sustained economic progress and inclusive policies should be devised to bridge income gaps over time.
The Path to Inclusive Growth
To ensure that increasing GDP translates into tangible benefits for the common man, it is crucial to address the limitations highlighted by the test results and focus on key areas for improvement:
Education and Skill Development
Investing in quality education and skill development programs remains critical to equipping individuals with the knowledge and expertise needed to thrive in a rapidly evolving economy. By empowering the workforce with relevant skills, they become more employable, leading to higher incomes and improved standards of living.
Infrastructure Development
A robust infrastructure serves as a catalyst for economic growth. Governments must prioritize the development of physical and digital infrastructure, which enhances connectivity, facilitates trade, and attracts investments. Improved infrastructure creates a conducive environment for businesses to thrive, leading to job creation and income growth.
Financial Inclusion
Promoting financial inclusion is essential to ensure that individuals from all strata of society have access to formal financial services. This includes expanding banking services, promoting digital payments, and providing affordable credit facilities. Access to financial services empowers individuals, facilitates entrepreneurship, and fosters economic participation.
Social Welfare Programs
Effective social welfare programs are crucial for addressing income disparities and poverty. By implementing targeted measures like direct income transfers, affordable housing initiatives, accessible healthcare provisions, and nutritional support, societies can establish a safety net that supports vulnerable populations and promotes inclusive growth. However, it is essential for these programs to be timely and reach the intended beneficiaries in order to fulfill their intended purpose. Unfortunately, there are instances where governments fall short of delivering on their promises, as exemplified by a video featuring the current Modi Government. The video highlights the government’s failure to fulfill its commitments to the common man, particularly evident in the reduction of farmer compensation from Rs. 8 lacs to a mere Rs. 30, revealing the pervasive issue of corruption that undermines the impact of government spending.
Addressing the Counterarguments
While there may be arguments suggesting no direct correlation between GDP growth and individual incomes, it is important to consider the multifaceted nature of economic progress. While immediate income gains may not be uniformly distributed across all segments of society, the positive spillover effects of GDP growth significantly contribute to improving the living standards and income potential of the common man over time. This is yet to be seen after 75+ years of Independence. This was also proved by the GC test result’s interpretation as stated above.
The government paved its votes by promising job creation and employment opportunities, so individuals can secure stable and rewarding positions in a growing market. As businesses expand to meet the rising demands of a thriving GDP, they require more skilled workers, leading to reduced unemployment rates and increased bargaining power for employees. This results in higher wages and improved financial stability for the common man. The trickle-down effect has still not been realized and GDP does not Cause per capita income to increase (p-value: 0.9849).
Moreover, the surge in consumer spending that accompanies GDP growth fuels economic progress. As individuals have more disposable income at their disposal, they are empowered to make purchases, thereby stimulating various sectors of the economy. The increased demand for goods and services prompts businesses to expand their operations, ultimately leading to a multiplier effect on employment and income generation. However, it is evident that this increase in consumption is the direct effect of an increase in imported goods and services. The “Make in India” program by PM Modi, has failed to gain traction and does not lead to an increase in disposable income as imports are significant at 99% with per-capita income (p-value: 0.0001).
It is important to note that government initiatives play a crucial role in translating GDP growth into tangible benefits for the common man. With increased resources at their disposal, governments can implement social welfare programs aimed at improving the lives of citizens. These programs may include initiatives to enhance access to education, healthcare, and financial support for those in need. By investing in social welfare, governments uplift marginalized sections of society and provide opportunities for economic mobility, leading to a more equitable distribution of income.
The belief that increasing GDP has an impact on the common man’s income is a misconception. The growth of GDP should pave the way for job creation, stimulate consumer spending, foster investment and entrepreneurship, and enables governments to implement social welfare programs. However, it is shocking to know that only government spending (p-value: 0.0332) causing GDP is significant only at 95% confidence interval. This suggests that government spending is not effectively utilized to improve the welfare and living standards of the common man.
These factors collectively contribute to improving the income prospects and overall well-being of the common man. As India’s GDP continues to surpass the 7% mark this fiscal year, it is evident that the upward trajectory of the economy holds promising prospects for income growth and economic prosperity for individuals across the nation. However, the common man is sill waiting for that day to come when he can earn more than inflation and improve his standard of living.
Conclusion
The statistical analysis of the Toda-Yamamoto GC test shows no significant relationships between GDP and indicators, it is important to understand that economic growth is a complex process with multiple variables at play. Policymakers must utilize a holistic approach to foster inclusive growth, focusing on education, infrastructure, financial inclusion, and social welfare programs. By addressing these areas, we can strive for a future where economic prosperity is shared by all, ensuring that no one is left behind on the path to progress.
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