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Economists revise GDP estimates with investment in intangibles

The US economy will officially become 3 per cent bigger in July as part of a shake-up that will see government statistics take into account 21st century components such as film royalties and spending on research and development. Billions of dollars of intangible assets will enter the gross domestic product of the world’s largest economy in a revision aimed at capturing the changing nature of US output. A brief look at the emerging scenario.

Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The production approach is also called Net Product or Value added method. This method consists of three stages:

  1. Estimating the Gross Value of domestic Output out of the many various economic activities
  2. Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
  3. Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.

Both firm-level and national income accounting practice have historically treated expenditure on intangible inputs such as software and R&D as an intermediate expense and not as an investment that is part of GDP.  Now, this exclusion of intangibles is increasingly questioned. Economists in USA pointed that business investment in intangibles is a vital aspect of business activity, and the investments shown below represent a large and growing portion of the overall economy.

    •    Computerized information (mainly computer software)
      • Scientific R&D
      • No-Scientific R&D
        • Cost of development of new motion pictures, films and other forms of entertainment.
        • Investment in new designs
        • Estimation of product development by financial services and insurance firms.
        • Investment in Economic Competencies
          • Spending on strategic planning
          • Spending on redesigning or reconfiguring existing products in existing markets,
          • Investment to retaining market share
          • Investment in brand names
          • Employee training.

 

The rapid expansion and application of technological knowledge in its many forms (research and development, capital-embodied technical change, human competency, and the associated firm-specific co-investments) are key features of recent U.S. economic growth. Accounting practice traditionally excludes the intangibles component of this knowledge capital and, according estimates exclude approximately $1 trillion from conventionally measured non-farm business sector output by the late 1990s and understates the business capital stock by $3.6 trillion.

Can we expect our GDP estimates to be revised likewise?

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Software Products can Spur Economic Growth

Over more than two decades, India earned a reputation as the global leader in software outsourcing, but product companies – perceived as the mark of a true technology powerhouse – have been few and far between. While India is still a long way from showcasing a Microsoft or a Google, unobtrusively, technology companies have sprung up across the country to create products and solutions that meet the demands of local businesses. Quite unlike an Infosys or a Wipro, which are the creatures of global demand, product companies are coming up with innovations made in India, by Indians and for Indians. From helping capture fingerprint and iris data for the Aadhaar card to crunching numbers so that chicken live healthier and longer, these companies are using cutting-edge technology to provide tailor-made solutions for Indian needs.

Software product firms are critical as economic growth is directly related adoption of IT by both trading and non-trading firms. Most macroeconomic and industry studies are based on the growth accounting framework, where the contribution of each input to production is assumed to be proportional to the corresponding share in total input costs. Increases in production above the inputs‟ contribution are ascribed to growth in multifactor productivity (MFP), i.e.: technological progress not embodied in production inputs. Since the mid 1990s, the patterns of productivity growth between Europe and the United States have been diverging.

  • 1950-1973: productivity growth in Europe follows a traditional catching up pattern sustained by strong investment and supporting institutions. This process came to an end by the mid 1970s.
  • 1973-1995: productivity growth in both Europe and the United States began to slow down. However, average annual labour productivity growth in the EU-15 was still twice as fast as in the United States and the productivity gap was very narrow by 1995.
  • 1995 onwards: the U.S. productivity growth accelerated while the rate of productivity growth in Europe fell.

The causes of the strong U.S. productivity resurgence have been extensively discussed. A growing body of research points out that the U.S. acceleration in productivity growth reflects underlying technology acceleration. The findings of this research stream, along with considerable anecdotal and microeconomic evidence, suggest that Information and Communication Technologies (ICTs) have played a substantial role. In the United States the MFP (Multi Factor Productivity) uptake in the late 1990s was supported by the industries using ICTs rather than by those producing them.

Europe and Japan showed that investment in IT capital would not automatically lead to productivity gains. To leverage ICT investment successfully, firms must typically make large complementary investments in intangible assets to change their business organisation and workplace practices. Training, consultancy and customization make up for most of intangible investment and local software product firms are better placed in integrating embodied capital with intangible capital.

Zinnov estimates that more than 5,000 large enterprises and over 10 million small and medium businesses in the country are ready to adopt technology. The product companies have a big role to play in pushing the expansion of the $30-billion ( 1.6-lakh-crore) technology market by some 18% this year.