Surprisingly, I did not get any comment to my post here. I will assume that this is only because most people did not know the answer, or could not understand he question, rather than because of a sudden decline in the popularity of my blog.

Actually, I had already given away the answer in the title, because I had fully intended to give the answer right there. The GDP “contribution” from inefficiency may not make a difference this year, but it certainly will the next year. Ergo, the growth rate will go down.

Why? Because the GDP grows due to investment, and investment comes from saving. I would have saved some part of the funds I would spare from not having to fix the broken window. Now both saving and consumption contribute to the GDP equally this year, but when my savings get invested in useful stuff, it contributes to GDP growth. The money that I would have saved could very well have funded a glass factory (either from an IPO I would invest in or a loan that the bank I put my savings in ) which would have increased the glass production. The money that is spent in repairing badly made roads could have been spent in making new roads which would made life better for a lot more people. All of these would have caused an increase in GDP next year.

The point of this is, if you have an extremely inefficient economy, you won’t see a high GDP growth rate. Conversely, it is wrong to look at India’s high growth rate and think: “Man, these guys are achieving a GDP growth of 8.5%. I wonder if it is because they have become vastly more inefficient.” In other words, Dilip is right about everything except his conclusion. He is wrong to conclude that the GDP calculation fails to account for the inefficiency in the economy. If you look at the growth rate (and who doesn’t?) it will. There are be other problems with the GDP, but this is not one of them.

There is a caveat to this. What I’ve said is true only if you look at the margins. If half of India’s infrastructure gets destroyed in a war, there will be a fake post war construction “boom”. The high growth rate generated in such a case will simply be a case of the country recovering from devastation. The growth rate will seem high because the base has shrunk. In normal cases, inefficiency only retards growth. It does not shrink the base.