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EDITORIAL ANALYSIS: Whose GDP is it anyway?

Prelims: Indian Economy (GDP, employment elasticity, Formal Jobs etc.)

Mains GS Paper III: Fiscal policy, Monetary policy, GDP, Issues related to planning etc.

ARTICLE HIGHLIGHTS

The article discusses the efficacy of GDP growth in measuring the overall well-being of common people.

Just go through the article once, note down 3-4 important points about benefits of using GDP and issues with GDP indicator. Do note down few ‘alternatives of GDP’, they are very innovative and you can use that in Economy as well as Essay paper.

 

INSIGHTS ON THE ISSUE

GDP growth matters to the average Indian only if it can generate good quality jobs and incomes for them.

GDP:

GDP is a measure of economic activity in a country. It is the total value of a country’s annual output of goods and services. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

 

GDP Growth and formal employment:

  • As per the data on ‘employment in public and organised private sectors’ published by the Reserve Bank of India (RBI): Between 1980 and 1990, every one percentage point of GDP growth (nominal) generated roughly two lakh new jobs in the formal sector.
    • In comparison, from 1990 to 2000, every one percentage point of GDP growth yielded roughly one lakh new formal sector jobs, half of the previous decade.
    • Similarly, between 2000 and 2010, one percentage point of GDP growth generated only 52,000 new jobs.

 

 

 

 

Thus, we can safely say India’s employment elasticity has been decreasing since the 1980s.

Employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth.

Comparison with other countries:

  • Srilanka: Sri Lanka produced two lakh jobs for every percentage of GDP growth in the 1990s decade; this dwindled to 90,000 by 2020.
  • USA: The U.S. today produces fewer new jobs for every percentage point of GDP growth than it did in the 1990s.
  • China: China produces one-third the number of new jobs today than it did in the 1990s for every percentage of its GDP growth.

Thus, high GDP growth now does not necessarily mean more jobs and incomes for people. Hence, GDP growth does not impact the common person today as much as it perhaps did four decades ago.

Other issues with GDP indicator:

  • Not a comprehensive measure: GDP growth may be an important economic measure, but it is becoming increasingly irrelevant as a political measure since it impacts only a select few and not the vast majority.
  • Simple but misleading: GDP is a simple metric that is a good indicator of economic progress which can be compared across nations. But over-reliance on GDP metrics is misleading for a country, as it doesn’t indicate inclusive growth.
  • Neglect social well-being: Even the World Bank and IMF projected fastest growing economies are unable to provide prosperity and social mobility for their people leading to an eruption of disillusionment among people and catalysing agitations and social disharmony.

 

The Counterview

Benefits of GDP as a tool to measure the growth of a nation:

  • Best among alternatives: GDP is not the perfect way to measure growth. But among the alternatives, it is the least “inaccurate” method to compute the growth rate of the country.
  • Use for planning and policy formulation: GDP growth over time enables central banks and policymakers to evaluate whether the economy is in recession or inflation. In that sense, it is still required.
  • Indicator of an overall standard of living: Generally, a nation’s standard of living increases as GDP increases.
  • Help measure inflation: Using Nominal and Real GDP measures
  • Shows general health of the economy:
    • As Samuelson and Nordhaus liken the ability of GDP to give an overall picture of the state of the economy to that of a satellite in space that can survey the weather across an entire continent.
  • Captures wellbeing: It is inaccurate to say that GDP does not capture wellbeing. It captures at least the well-being that results from the production of goods and services.

 

Way forward

  • A Commission on the Measurement of Economic Performance and Social Progress set up by France concluded that “what we measure affects what we do” and recommended an expanded dashboard of multiple indicators unique for each country.
  • Green GDP could be used 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.
  • “Genuine Progress Indicator,” “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.”
  • There are more direct measures of well-being such as the Happy Planet Index, Gross National Happiness and National Well-Being Accounts.

Conclusion:

Nobel laureate Simon Kuznets, who conceived of GDP as a measure of economic performance, never intended it to be the single-minded economic pursuit for a nation that it has now become, and warned repeatedly that it is not a measure of societal well-being.

Thus India needs to overhaul its economic performance measurement framework, by moving away from the excessive reliance on GDP growth numbers toward a more comprehensive measurement framework of economic and social performance. This could involve multiple indicators rather than just one metric.