The Need For India-Specific Economic Indicatorsby Opinion Express March 28, 2018 0 comments
GDP is losing its importance as the perfect indicator of growth and, therefore, it is a necessity for Indian economists top construct an indicator that is suitable for the Indian economy and stop adopting the concepts of the West.
The World Bank’s Global Economic Prospects report, predicting India’s gross domestic product (GDP) to grow at 7.3 per cent in 2018-19 and further at 7.9 percent for the next two years thereafter, kicked off a major furore with the Opposition criticising it and the Government defending its policies. However, with world-renowned economists like International Monetary Fund chief Christine Lagarde, Nobel Prize winner and Columbia University’s Joseph Stiglitz and MIT’s Erik Brynjolfsson declaring that GDP has a poor way of assessing the health of our economies, shouldn’t the political parties rise above the blame game, assess the relevance of GDP in today’s digital age and take a lead in developing a more comprehensive and appropriate new measure to gauge the growth of the economy?
For decades, the growth of any economy has been measured by GDP, which is the monetary value of the goods and services that a country produces in a specific year. However, off late, it is being observed that this statistic that economies and businesses worldwide swear by may not be the correct measurement of growth after all because of some of its drawbacks. Although GDP measures income, it fails to measure poverty, income inequality, health and quality of life; although it measures growth but fails to measure environmental damage. Nevertheless, in spite of its shortcomings, GDP has become the single most important tool for Governments, financial institutions and policymakers since its inception in the 1930s.
With the advent of the fourth industrial revolution and its subsequent challenges, like reinvention of business landscapes, demographic shifts, expansion of inequality, worsening of climate change and advancement of technology at breakneck speed, GDP is losing its sheen. This latest industrial revolution, powered by tremendous growth in technology, has enhanced the quality of lives of millions across the globe with never before products and services that have enriched the efficiency and pleasure of their personal lives, be it ordering food, educating oneself, meeting a doctor or playing games online, technology has pervaded us deeply and, therefore, to assess the health of these new economies and the people living in them, a new measure other than GDP which is more comprehensive needs to be found out.
According to experts, GDP is a partial and misleading indicator of growth and well-being. So, can a nation, hit by a natural calamity which led to massive destruction, lead to growth in GDP? The answer surprisingly is yes, and the fault lies in the way GDP is calculated. Since after a calamity, there is a lot of investment to rebuild the entire ecosystem, this is perceived as growth, whereas, it is nothing but physical and human loss. In addition, a country is classified as a healthier economy when it has a higher growth rate as compared to one with a relatively low growth rate.
However, it is not advisable to categorise economies merely based on GDP as it may lead their erroneous analysis and classification. A country with a low economic base would naturally have a high GDP growth rate compared to a developed country as it starts growing from a preliminary stage and basic infrastructural developments would translate into substantial GDP growth rates.
Some of the fastest growing economies in the world are almost always developing countries, mostly in Africa and Asia, that grow at eight or nine per cent and, sometimes, even experience double-digit growth rates. However, GDP growth rates of three to four per cent for advanced economies like the US, Canada or the UK are considered very impressive growth rates.
This is because advanced economies are mature economies which have sizable GDPs. This means that comparing a relatively high growth rate of a developing country with the relatively low growth rate of a developed country is meaningless. It does not indicate that the former has a more dynamic economy than the latter. GDP calculation also totally ignores the unorganised sector which is the most important and vibrant sector in any growing economy and does not adjust for leisure time and distribution of goods. It also does not calculate and adjust for environmental pollution and disasters.
Above all, the way GDP is calculated presently has a major inability to fully capture the benefits of technology. Countries worldwide are trying to adopt different ways to overcome these shortcomings like China is proposing to adopt “green GDP” which attempts to adjust for environmental factors, OECD’s “GDP alternatives”, which adjust for leisure, the “Index of Sustainable Economic Welfare”, which accounts for both pollution costs and the distribution of income; and the “Genuine Progress Indicator”, which adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution”. Bhutan, however, is a great example of a country that has chosen to use “Gross National Happiness” as a performance measure instead of GDP for the last four decades.
Having identified GDP’s failure to measure a number of things, Governments globally are trying to develop new system of indicators. Under Obama’s Administration, a group of economists started working on 10 to 15 key measures from a set of around 300 diverse indicators, including health, education, crime and justice, art and culture, the environment and the economy. GDP was also deconstructed in Europe in 2009 with France taking the lead.
The UK has a committee to include natural capital in its national accounts by 2020. Earlier this year, World Bank published a report that analysed the wealth of 141 countries from 1995 to 2014 and argued that wealth is a better judge of economic success since it includes human capital, natural capital, produced capital and net foreign assets. A focus on GDP is being considered more of a short-term in nature than being long-term and sustainable in nature.
GDP growth rates neither reveal anything about the structure of the economy or its stage of development nor state anything about the prosperity and standard of living of its citizens. One must be very careful when making cross-country comparisons of GDP growth rates and an evaluation based solely on GDP growth rates would be misrepresentative when considering the economic health of countries. However, none of the measures proposed so far is perfect, and GDP may not be replaced anytime soon.
In the meanwhile, India has a bank of prestigious economists and in the backdrop of GDP losing its sheen as an ideal indicator of economic growth, there is a never before opportunity for the Indian economists to take the initiative and construct India specific economic indicator suitable for its agrarian economy, instead of aping the West.
This an exciting quest in developing these economic indicators as it will also enable the greatest minds to create diagnostic tools, that could save endless money and debates on the economic and social benefits of Government schemes and policies.
Writer: Hima Bindu Kota
Courtesy: The Pioneer