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GS Paper: Indian Economy

  • Government sets up ‘bad bank’ to clear the NPA mess

    Paving the way for a major clean-up of bad loans in the banking system, the Union Cabinet has cleared a ₹30,600-crore guarantee programme for securities to be issued by the newly incorporated ‘bad bank’ for taking over and resolving non-performing assets (NPAs) amounting to ₹2 lakh crore.

    What is a Bad Bank?

    • A bad bank conveys the impression that it will function as a bank but has bad assets to start with.
    • Technically, it is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
    • Such a bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans.
    • The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.

    Bad Banks to be established

    • The NARCL-IDRCL structure is the new bad bank.
    • The National Asset Reconstruction Company Limited (NARCL) has already been incorporated under the Companies Act.
    • It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases.
    • Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

    How will the NARCL-IDRCL work?

    • The NARCL will first purchase bad loans from banks.
    • It will pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
    • When the assets are sold, with the help of IDRCL, , the commercial banks will be paid back the rest.
    • If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked.
    • The difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.

    Will a bad bank resolve matters?

    • From the perspective of a commercial bank saddled with high NPA levels, it will help.
    • That’s because such a bank will get rid of all its toxic assets, which were eating up its profits, in one quick move.
    • When the recovery money is paid back, it will further improve the bank’s position.
    • Meanwhile, it can start lending again.

    Why do we need a bad bank?

    • The idea gained currency during Rajan’s tenure as RBI Governor.
    • The RBI had then initiated an asset quality review (AQR) of banks and found that several banks had suppressed or hidden bad loans to show a healthy balance sheet.
    • However, the idea remained on paper amid lack of consensus on the efficacy of such an institution.
    • ARCs have not made any impact in resolving bad loans due to many procedural issues.
    • While commercial banks resume lending, the so-called bad bank, or a bank of bad loans, would try to sell these “assets” in the market.

    Good about the bad banks

    • The problem of NPAs continues in the banking sector, especially among the weaker banks.
    • The bad bank concept is in some ways similar to an ARC but is funded by the government initially, with banks and other investors co-investing in due course.
    • The presence of the government is seen as a means to speed up the clean-up process.
    • Many other countries had set up institutional mechanisms such as the Troubled Asset Relief Programme (TARP) in the US to deal with a problem of stress in the financial system.

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  • How not to deal with recession

    Context

    The Centre is facing a serious financial crisis because of the exigencies created by the pandemic and its own policies. However, monetising assets and cutting down funds to states could aggravate the crisis.

    3 Policies aggravating the crisis

    1) NMP and disinvestment

    • Union Finance Minister, while announcing the National Monetisation Pipeline (NMP), said that asset monetisation is based on the philosophy of creation through monetisation and is aimed at “tapping private sector investment for new infrastructure creation”.
    • Loss of dividend: Disinvestment of profitable Navratna companies will result in a loss of dividend, a major source of income for the Centre.
    • Loss due to tax exemptions: Tax exemptions to the investors will take away another major share of income.
    • Central funds will be squeezed and this, in turn, will have a bearing on state finances.
    • NMP will seriously hurt the interests of the country.

    2) Cutting down funds to States

    • Kerala’s case: The state was getting about 3.92 per cent from the divisible pool in the 1970s and 1980s.
    • It came down to 2.66 per cent and 2.34 per cent in the awards of the 12th and 13th Finance Commissions.
    • The 14th Finance Commission award increased it to 2.45 (2.50) per cent.
    • Now, the 15th Finance Commission has reduced it to 1.92 per cent.
    • This arbitrary cut is a result of the adoption of certain new yardsticks by the commission without considering the state government’s views
    • The 15th Finance Commission’s special grant (RD grant) of Rs 19,800 crore for this year will no longer be available in the coming years.
    • Karnataka and many other states have also suffered because of the policy to reduce the divisible pool share.

    3) Tax exemptions and surcharge

    • Exemptions amounting to Rs 99,842.06 crore were extended to corporate houses in 2019-20.
    • Many taxes on goods were reduced because of electoral compulsions. This reduced central revenues.
    • Along with such tax exemptions, the increased use of cesses and surcharges is responsible for the shrinking of the shareable pool.
    • The shareable resources with the Centre was around Rs 6.8 lakh crore in 2019-20 which has come down to Rs 5.5 lakh crore in 2020-21.
    • All the cesses and surcharges that are not shared with states come to about 20 per cent of the total revenues of the Centre.
    • States have been demanding that this money should be shared with them, particularly while fighting a pandemic.
    • States complaining for resources does not augur well for cooperative federalism.

    Way forward

    • Developing basic infrastructure and the production sector is the only way to face an economic crisis.
    • That should not be done by selling or handing over public assets to private individuals and corporations.
    • We need massive public investment that will help people to form cooperatives and collectives in agriculture and industrial production.
    • Parliament, the National Development Council and the GST Council should discuss this unprecedented situation.

    Conclusion

    We need to find a way out collectively. Handing over the rights on public properties to private individuals will take the country back to the colonial era. This must not be allowed.

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  • Centre and states must strike bargain on GST

    Context

    After one and a half years of dispute, and with the economy showing signs of recovery, a path forward for the GST finally seems visible. This opportunity needs to be seized to strike the Centre-State bargain.

    How GST performed so far

    •  The contributors are many but the critical one has been simply a lack of revenues.
    • Initially, the GST performed well, with collections soaring to Rs 11.8 lakh crore in the first full year of implementation in 2018-19.
    • But in 2019-20, the growth rate decelerated sharply. And in 2020-21, collections actually fell.
    • As future collections became uncertain, a gap opened up between the amount that the Centre felt it could afford to promise and the minimum that the states felt they needed and were entitled to.
    • More recently, however, confidence in GST has improved.
    • Collections have revived, averaging Rs 1.1 lakh crore in the first five months of the current fiscal year, exceeding even pre-pandemic levels.

    What explains the weak revenue performance of the GST?

    • Slowing economy: The GST’s past performance now seems much better than it once did.
    • We now know that after 2018-19, nominal GDP growth slowed from 10.5 per cent in 2018-19 to 7.8 per cent the next year and -3 per cent in 2020-21.
    • Effective rate cuts: The RBI has pointed out, the effective tax rate has fallen by nearly 3 percentage points because of rate cutting in 2019, in which both the Centre and states were complicit.
    • Thus the weak revenue performance of the GST now seems attributable to wider economic difficulties and policy actions, rather than problems with the tax itself.

    Necessary changes: Opportunity for striking bargain for Centre and States

    1) Principle of compensation must be re-cast: Create revenue buffer

    • As the GST was a new tax, so states were guaranteed against the teething troubles that would inevitably arise for the next five years.
    • Five years on, this logic is less compelling.
    • The GST as tax reform has reached maturity, well understood by producers, consumers, and tax officials.
    • At the same time, the last few years have exposed the vulnerability of the states to shocks such as Covid-19 pandemic.
    • Way forward: To prevent this situation from recurring, the authorities should create a revenue buffer that could be tapped in a time of need.
    • In sum, there is a bargain waiting to be struck: The states give up their demand for an extension of the compensation mechanism, while the Centre offers a new counter-cyclical buffer.
    • As the figure shows, in good economic times, GST revenues will be robust but it is against downturns that states need protection.
    • The shift to revenue insurance, in turn, should allow the compensation cess to be abolished. 

    2) The GST structure needs to be simplified and rationalised

    • The GST structure needs to be simplified and rationalised, as recommended by the Fifteenth Finance Commission and the Revenue Neutral Rate report.
    • New rate structure: A new structure should have one low rate (between 8 and 10 per cent), one standard rate (between 16 and 18 per cent) and one rate for all demerit goods.
    • The single rate on demerit goods also requires eliminating the cesses with all their complexity.

    3) The GST Council’s working needs changes

    • Consensus-based decision making in GST Council can be sustained only if there is a shared sense of participatory and inclusive governance. 
    • Nearly two decades ago, when the VAT was being introduced, Yashwant Sinha established a culture of consensual discussions on indirect taxes.
    • He did this by requiring the Empowered Committee of State Finance Ministers to be headed by a finance minister from an Opposition-run state government.
    • The spirit of this idea could be translated to the GST Council.

    Consider the question “Inherent importance of GST and its significance for the cooperative federalism underline the necessity for the Centre and the States to strike the win-win bargain. In light of this, examine the issues with the GST and suggest the way forward to deal with these issuef.”

    Conclusion

    Cooperative federalism is not a gesture or one-off outcome. It is, above all, a disposition, resulting from quotidian democratic practice. By rehabilitating cooperative federalism’s finest achievement — the GST — the Centre and states can help restore India’s broader economic prospects.

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  • What is Input Tax Credit?

    The Supreme Court has confirmed a Madras High Court judgment which upheld a fiscal formula included in the Central Goods and Service Tax Rules to execute refund of unutilized Input Tax Credit (ITC) accumulated on account of input services.

    What is Input Tax Credit?

    • Input credit means at the time of paying tax on output, you can reduce the tax you have already paid on inputs.
    • Say, you are a manufacturer – tax payable on output (FINAL PRODUCT) is Rs 450 tax paid on input (PURCHASES) is Rs 300 You can claim INPUT CREDIT of Rs 300 and you only need to deposit Rs 150 in taxes. See here:

    Pc: Cleartax.in

    The case in discussion

    • The apex court Bench led, by Justice D.Y. Chandrachud, passed the judgment in the face of two contradicting judgments of Gujarat and Madras High Courts on the validity of Rule 89(5) of the Central GST Rules, 2017.
    • Rule 89(5) provides a formula for the refund of ITC, in “a case of refund on account of inverted duty structure”.
    • The Gujarat High Court had held that by prescribing a formula in sub-Rule (5) of Rule 89 to execute refund of unutilized ITC accumulated on account of input services.
    • The Madras High Court, while delivering its judgment declined to follow the view of the Gujarat High Court.

    Answer this PYQ in the comment box:

    Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

     

    [wpdiscuz-feedback id=”555s0bzkxm” question=”Please leave a feedback on this” opened=”1″]Post your answers here[/wpdiscuz-feedback]

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  • Financial inclusion

    Context

    There are 63.4 million MSMEs in India and 99 per cent of which are micro-enterprises with less than Rs 10 lakh in investment. Financial inclusion and integration is key to bring these businesses into the formal economy.

    Financial integration

    • What is Financial inclusion? On the front of “financial inclusion”, which refers to the accessibility of banking and availability of credit, we have made significant progress.
    • Financial integration:  The journey from inclusion to integration is not only about making products available and accessible, but also about making them relevant, applicable, and acceptable.

    Demand size challenges

    1) Gap between demand and supply of capital

    • Due to a limited risk appetite, low or thin-file data on customers and challenging regulatory oversight, capital remains a constraint in designing bespoke products.
    • Way forward: For India to overcome these challenges, the existing infrastructure must be adapted to our new purpose, providing easy-to-use, customer-centric experiences.

    2) Accessibility

    •  Greater accessibility has major benefits for not only the customer but also the supplier.
    • For example, in rural India, people tend to save in the post office, because of village postal agents collect their savings from their doorstep.

    3) Intelligent product design and delivery

    • Products must be designed and delivered intelligently to meet the customer where they are, and by keeping in mind that they use products to reach their goals.
    • This involves tailoring the products to the needs and income profile of the customer, including being cognisant of their environment, geography, and demography.

    4) Lowering the operating costs

    • In the traditional financial system, the design and distribution cost on financial products at sachet size is high.
    • Financial service providers are consequently dissuaded from attempting to reach rural, financially excluded groups.
    • By using the power of machine learning and cloud infrastructure, we can significantly lower operating costs while offering customers affordable, bespoke financial products.

    5) Demand-side issues: Financial literacy and technology readiness

    • Financial literacy and technology readiness are two critical issues on the demand size.
    • Financial education assists people in making sound financial decisions.

    Consider the question “Benefits of the financial inclusion remain unrealised without financial integration. In light of this, examine the challenge in financial integration in India and suggest the way forward” 

    Conclusion

    It is our responsibility to create an ecosystem for them to deploy this capital of courage.

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  • Decoding asset monetisation

    Context

    The National Monetisation Pipeline (NMP), a bold initiative was recently announced by the Finance Minister.

     PPP model and issues with it

    • BOT: The PPP was about attracting private parties to build, operate and then transfer ‘greenfield’ or new infrastructure projects under build-operate-transfer (BOT) concession agreements.
    • More risks for the private sector: The winning private bidder had to take not only the operating risk, but also the development and construction risk of the project, such as a toll road, from scratch.
    • Why it was prone to delays?:  It involved the acquisition of land. This process became controversial and was subject to delay.
    • It involved securing environmental and other regulatory approvals. These proved challenging to obtain.
    • Undermining the trust: Compliance with these became a source of friction between the concessioning authority and the concessionaire.
    • All this undermined trust between the public and private parties and led to a huge volume of disputes for which there was no readily available resolution mechanism.

    How NMP is different from PPP?

    • Brownfield assets: The NMP is about leasing out ‘brownfield’ infrastructure assets such as an already operating inter-State toll highway under a toll-operate-transfer (TOT) concession agreement.
    • No land acquisition: In such an arrangement no acquisition of land is involved.
    • No construction risk: Nor does the concessionaire need to take any of the construction risk.
    • It is also certain to attract a different class of private capital.
    • To be successful in the BOT bids required a proven ability to navigate and manage the system.
    • Under the NMP, what will be required is operational experience in running a particular class of infrastructure assets and a strong understanding of the potential cash flows generated over the life of the concession.
    • This is certain to attract the largest global pension funds.

    Way forward

    • Allow flexibility: Given the long tenure of these concession agreements, they must be designed to allow for some flexibility so that each party has the opportunity to deal with unforeseen circumstances (such as climate-related disasters).
    • Performance standards: Contracts must also incorporate clear key performance indicators expected of the private party and clear benchmarks for assets as they are handed over by the government at the start of the concession.
    • Ensure effective implementation: No matter how well a contract is crafted, it still needs to be implemented effectively.
    • No opacity in concessional agreements: Experience shows that there is a tendency for government departments to inject opacity so that they have more power over the concessionaire.
    • To avoid this, it would be useful if the responsibility for administering the concession agreements did not lie directly with the line ministries and/or their agencies.
    • Dispute resolution mechanism: It is vital to put in place a robust dispute resolution mechanism.
    • Institute for contracts: There is a strong case to set up a centralised institution with the skills and responsibility to oversee contract design, bidding and implementation.
    • An institution such as ‘3 PPP India’, first mooted in the 2014 Budget, is needed.
    • Set up tribunal: It would also be advisable to set up an Infrastructure PPP Adjudication Tribunal along the lines of what was recommended by the Kelkar Committee (2015).
    • Start with predictable sectors: The government could start with sectors that offer the greatest cash flow predictability and the least regulatory uncertainty before expanding the experiment.

    Conclusion

    The NMP significantly differs from the PPP model and seeks to avoid its shortcomings through various changes.

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  • What the Q1 GDP numbers say

    Context

    India’s GDP data for Q1 of 2021-22 was released on August 31, 2021. The data revealed the real GDP growth at 20.1% in Q1.

    Making sense of the growth

    • Base effect: Real GDP growth at 20.1% in Q1 of 2021-22 is largely because of the contraction of 24.4% in the corresponding quarter of the first COVID-19 year, that is, 2020-21.
    • The Q1 2021-22 output and GDP growth data reflect a strong base effect since the corresponding levels of Q1 of 2020-21 were significantly adversely impacted by the first wave of COVID-19.
    • Fall in magnitude: The magnitude of real GDP fell short of the corresponding level in 2019-20 by a margin of ₹3.3 lakh crore.
    • Required rate: A growth rate of 32.3% was required in Q1 of 2021-22 for achieving the same level of real GDP as in Q1 of 2019-20.
    • To achieve the annual growth of 9.5% as forecast by both the Reserve Bank of India and the International Monetary Fund for 2021-21, an average growth of 6.8% in the remaining part of the year would be required.
    •  The task would become relatively more demanding in Q3 and Q4 considering that the real GDP growth was positive at 0.5% and 1.6%, respectively, in the corresponding quarters of 2020-21.

    Analysing the demand side

    1) Private consumption growth lagging overall GDP growth

    • Largest segment: The largest segment of GDP viewed from the demand side is private final consumption expenditure (PFCE).
    • Its average share over the last three years (2018-19 to 2020-21) was 56.5%.
    • If PFCE were to reach back the 2019-20 level, it should have grown by 35.5% in this quarter.
    • The recovery in private consumption demand is lagging behind the overall GDP growth.
    • Way forward: Private consumption depends largely on income growth and its distribution.
    • Therefore, it would be useful to focus on further supporting income and employment levels for the MSMEs and informal sectors of the economy which have a higher propensity to consume.

    2) Export and investment: positive outcome in Q1

    • Noticeable positive outcomes in Q1 of 2021-22 came from exports and to some extent, from investment as reflected by gross fixed capital formation (GFCF).
    • Exports grew by 39.1% over a contraction of 21.8% in Q1 of 2020-21.
    • This differential is reflected in a positive growth of 8.7%.
    • Investment: In the case of GFCF, the base effect was quite large.
    • Despite a growth of 55.3% in Q1 of 2021-22, its magnitude was still 17.1% lower than the corresponding level in Q1 of 2019-20.

    3) Contraction in government final consumption

    • The only demand segment which contracted even with reference to Q1 of 2020-21 was government final consumption expenditure (GFCE).
    • This contraction was by a margin of (-) 4.8%.

    Analysing the output side

    1) Key service sectors

    • The key service sector — namely trade, transport, storage grew by 34.3% in Q1 of 2021-22 as compared to a contraction of 48.1% in Q1 of 2020-21.
    • However, relative to its level in Q1 of 2019-20, the output of this large service sector was significantly lower by 30.2% in Q1 of 2021-22.
    • Though public administration, defence and other services showed a growth of 5.8% in Q1 of 2021-22 over Q1 of 2020-21, they actually reflected a contraction of 5.0% as compared to Q1 of 2019-20.

    2) Agriculture

    • The key positive news came from the agricultural sector which showed a growth of 4.5% in Q1 of 2021-22, in continuation of annual growth of 3.6% in 2020-21.
    • Given agriculture’s positive growth in all the quarters of 2020-21, further contribution from this sector to the overall growth may not be expected.
    • Its average weight to the overall output is also low at about 15%.
    •  It is the high weight manufacturing sector and the two substantive service sectors — trade, transport et. al and financial, real estate et al. — which will have to support growth in the remaining part of the year.

    Way forward

    • Government should raise the demand: The Centre’s fiscal deficit in the first four months of 2021-22 amounted to only 21.3% of the budgeted target as compared to the corresponding average level of 90% over the last four years.
    • Clearly, significant policy space is opening up for the government to raise its demand and its contribution to output in the remaining part of the current fiscal year.
    • Dealing with likely third wave: Attempts should be made either to bypass or at least curb the adverse impact of COVID-19’s likely third wave.
    • Vaccination and investment in health infra:  Both the coverage of vaccination and the pace of investment in health infrastructure should be accelerated.
    • As revenues improve, expenditures can be increased.
    • There is no need to reduce the fiscal deficit below the budgeted level of 6.8% of GDP.

    Consider the question “To make up for the loss of output in the last two years India needs to embark on the path of high growth trajectory. Suggest the measure to achieve this objective.”

    Conclusion

    We need a faster rate of growth to make up for the loss of output in the previous two years from the trend rate. We must lay the foundation for faster growth in this year itself.

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  • Container shortage and its impact on international trade

    The government is in talks with exporters to help them deal with an international container shortage that has led to freight rates rising by over 300 per cent in the past year for key shipping routes.

    Why is there an international container shortage?

    • The reduction in the number of shipping vessels operating as a result of the Covid-19 pandemic has led to fewer empty containers being picked up.
    • This has left many containers in inland depots and stuck at ports for long durations.
    • Long waiting times at key ports such as those in the US due to congestion are also contributing to lengthening turnaround time for containers.
    • A sustained global economic recovery has added to the impetus to trade.
    • Some countries are willing to pay a premium for empty containers and that this was further adding to the container shortage.

    Freight rate impact

    • The lack of availability of containers and the faster than expected recovery in international trade has pushed up freight rates significantly over the past year.
    • Some key international routes are seeing an increase in freight rates of over 500 per cent compared to September last year.
    • Structural problems such as the high turnaround time for ships in India also add to the container shortage issue that exporters are currently facing.

    How is the container shortage impacting Indian exporters?

    • Delay: Indian exporters are facing major delays in their shipments and consequent liquidity issues as they have to wait longer to receive payment for exported goods.
    • Liquidity crunch: Exporters noted that shipments that used to take 45 days are now taking 75-90 days leading to a 2–3-month delay in payments leading to liquidity crunch particularly for small exporters.

    How can the government help address this issue?

    • Exporters are calling on the government to regulate the export of empty containers.
    • Exporters have asked the government to curb the export of empty containers at all Indian ports in line with a move by the Kolkata port which restricted the number of empty containers permitted to be exported to 100 per vessel for a three month period.
    • Exporters are also calling on the government to release about 20,000 containers that have been abandoned or are detained by government agencies so that they can augment supply.
    • Indian exporters has also called on the government to notify a freight support scheme for all exports till the end of the fiscal when freight rates are expected to normalise.
    • They are also asking the government to push back on a move by shipping lines to offer priority bookings at higher rates, asking that shipping lines revert to taking bookings on a first come first serve basis.
    • In the medium term, exporters have called on the government to take steps to boost the manufacturing of containers in India.

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  • Catching up on PLI scheme for textile sector

    Context

    The Cabinet approved the Production-Linked Incentive (PLI) scheme for the textile sector that is expressly targeted at the man-made fibre (MMF) and technical textiles segments.

    Why India needs to focus on Man-made fibre (MMF) in textile trade

    • Preference for MMF:  The MMF surpassed cotton as the fibre of choice in the 1990s.
    • The MMFs share in worldwide textile consumption is about 75%.
    • Dominance of natural fibre in India’s export: India’s textile and clothing exports have continued to remain dominated by cotton and other natural fibre-based products.
    • The MMF have contributed less than 30% of the country’s $35.6 billion in overall sectoral exports in 2017-18.
    • While policy makers have been cognisant of the need to bolster support for the MMF segment.

    About the scheme

    • The PLI scheme has a budgeted outlay of ₹10,683 crore.
    • Incentive at two levels: The incentives have been categorised into two investment levels.
    • First level: Firms investing at least ₹300 crore into plant and machinery over two years would need to hit a minimum turnover of ₹600 crore before becoming eligible to receive the incentive over a five-year period.
    • Second level: At a second level an investment of ₹100 crore with a pre-set minimum turnover of ₹200 crore would enable qualification for the incentive.
    • Intermediate products included: The aim of the scheme is to specifically focus investment attention on 40 MMF apparel product lines, 14 MMF fabric lines and 10 segments or products of technical textiles.
    • The inclusion of intermediate products reflects the Government’s keenness to ensure the scheme ultimately delivers on the broader policy objectives.

    Conclusion

    Operational success of the scheme is likely to hinge on how new entrepreneurs and existing companies weigh the risk-reward equation, especially at a time when the pandemic-spurred uncertainty has already made private businesses leery of making fresh capital expenditure.

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  • Why we must focus on Human Development not GDP growth?

    The much-anticipated estimates of gross domestic product (GDP) for the first quarter of the fiscal year 2021-22 were released on 31 August. This has seen an unprecedented decline in GDP at 24.4%.

    Why debate this?

    • An increasing GDP is often seen as a measure of welfare and economic success.
    • However, it fails to account for the multi-dimensional nature of development or the inherent short-comings of capitalism, which tends to concentrate income and, thus, power.
    • The real issue thriving the Indian Economy is the relevance of GDP estimates as the sole or most important indicator of a recovery.
    • Our economy was slowing down even before the pandemic and was then devastated by it.

    GDP as an indicator

    • Economic growth assesses the expansion of a country’s economy.
    • Today, it is most popularly measured by policymakers and academics alike by increasing gross domestic product or GDP.
    • This indicator estimates the value-added in a country which is the total value of all goods and services produced in a country minus the value of the goods and services needed to produce them.
    • It is common to divide this indicator by a country’s population to better gauge how productive and developed an economy is – the GDP per capita.

    A brief history of Growth and GDP

    • The concept of economic growth gained popularity during the industrial revolution, when market economies flourished.
    • In the 1930s, Nobel laureate, Simon Kuznets wrote extensively about national statistics and propagated the use of GDP as the measure of the national income of the US.
    • Against the backdrop of a bloody world wars, governments were on the look for analytical tools to raise taxes to finance the newly minted war machine.
    • It was at the 1944 Bretton Woods conference that GDP became the standard tool for measuring a country’s economy.
    • Right from the classicals to the neo-classicals, the idea of development was intertwined with economic growth, i.e. accumulation of wealth and production of goods and services.

    Prominence of GDP today

    • GDP as a measure of economic growth is popular because it is easier to quantify the production of goods and services than a multi-dimensional index can measure other welfare achievements.
    • Precisely because of this, GDP is not, on its own, an adequate gauge of a country’s development.
    • Development is a multi-dimensional concept, which includes not only an economic dimension, but also involves social, environmental, and emotional dimensions.

    Limitations of GDP

    • One of the limitations of GDP is that it only addresses average income, failing to reflect how most people actually live or who benefits from economic growth.
    • There is also a possibility that the wealth of a society becomes more concentrated and why this is counterproductive to development.
    • If left unchecked, growing inequalities can not only slow down growth, but also generate instability and disorder in society.

    Therefore, a growing GDP cannot be assumed to necessarily lead to sustainable development.

    Relevance since COVID times

    (a) Failure to capture informal economy

    • A decline in economic activity, as captured by GDP data, is only one part of the distress caused by the slowdown and covid.
    • GDP estimates hardly capture the extent of depressed economic activity in the informal sector.
    • This makes it irrelevant to the cause of understanding the changing fortunes of workers and others who are dependent on these activities.
    • India’s informal sector is not only a significant part of the overall economy but is crucial for generating broad demand, given the significantly large proportion of our population that depends on it.

    (b) Rise in distress employment

    • Most worrisome is a reversal of the trend of non-farm diversification due to reverse migration.
    • After more than five decades, we have seen an actual increase in the proportion of workers employed in agriculture.

    (c) Farmers losses

    • Farmers have fared badly. Already suffering from low output prices, the majority of farmers have seen incomes decline as input costs rose (such as on diesel and fertilizers).
    • Even though our farm sector appears relatively unaffected by covid, the ground reality of farmer incomes is at complete variance with the aggregate statistics from the national accounts.
    • The failure to capture livelihood and income losses in the informal sector is only one aspect of our GDP data inadequacy.

    GDP can never account this

    • This failure to reflect the economic conditions of our population’s majority is partly a result of the way data on GDP is calculated, but also due to infirmities of the database itself.
    • But its limitations at the conceptual level are far more serious.

    Alternate measures

    • One expanded indicator, which attempts to measure the multi-dimensional aspect of development, is the Human Development Index (HDI) by UNDP.
    • It incorporates the traditional approach to measuring economic growth, as well as education and health, which are crucial variables in determining how developed a society is.
    • In 2018, the World Bank launched the Human Capital Index (HCI).
    • This index ranks countries’ performances on a set of four health and education indicators according to an estimate of the economic productivity lost due to poor social outcomes.

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    National Income Accounting