From UPSC perspective, the following things are important :
Prelims level : GDP
Mains level : Paper 3- Need for overhaul of India's economic performance measurement framework
It is then apparent that GDP growth matters to the average Indian only if it can generate good quality jobs and incomes for them.
- 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.
- Irrefutably, GDP is an elegant and simple metric that is a good indicator of economic progress which can be compared across nations.
- But a compulsive chase for GDP growth at all costs can be counter-productive, since it is not a holistic but a misleading measure.
- The excessive obsession over GDP growth by policymakers and politicians can be unhealthy and dangerous in a democracy.
- If growth in GDP does not translate into equivalent economic prosperity for the average person, then in a one person-one vote democracy, exuberance over high GDP growth can backfire and trigger a backlash among the general public.
- Global phenomenon: Sri Lanka’s mass uprising and people’s revolution can partly be explained through this prism of the structural break between headline GDP growth and economic prosperity for the people.
- The U.S. today produces fewer new jobs for every percentage point of GDP growth than it did in the 1990s.
- China produces one-third the number of new jobs today than it did in the 1990s for every percentage of its GDP growth.
Employment intensity of economic growth
- Data of ‘employment in public and organised private sectors’ published by the Reserve Bank of India (RBI) shows that in the decade between 1980 and 1990, every one percentage point of GDP growth (nominal) generated roughly two lakh new jobs in the formal sector.
- In the subsequent decade from 1990 to 2000, every one percentage point of GDP growth yielded roughly one lakh new formal sector jobs, half of the previous decade.
- In the next decade between 2000 and 2010, one percentage point of GDP growth generated only 52,000 new jobs.
- The RBI stopped publishing this data from 2011-12.
- In essence, one percentage of GDP growth today yields less than one-fourth the number of good quality jobs that it did in the 1980s.
- It is amply clear that the correlation between formal sector jobs and GDP growth has weakened considerably.
Implications of decline in GDP growth’s contribution to job creation
- Irrelevant as a political 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.
- Indicates changed nature of economic development: This divorce of GDP growth and jobs is both a reflection of the changed nature of contemporary economic development with emphasis on capital-driven efficiency at the cost of labour and GDP being an inadequate measure.
- Political backlash: The perils of the obsession over GDP growth will be felt by politicians who have to answer voters on lack of jobs and incomes despite robust headline growth.
- Voter disenchantment over the economy not working for them is already rife in many democracies across the world that have catalysed agitations and social disharmony.
- Electoral outcomes in favour of extreme positions in mature democracies such as the U.S., the U.K., France and Germany in the last decade may partly be a reflection of voters’ sense of deception over economic gains.
- It is time for India’s political leaders to not be drawn into argument over GDP growth every quarter and instead clamour for an overhaul of India’s economic performance measurement framework to reflect what truly matters to the common person.
GDP growth has turned into a misleading and dangerous indicator that portrays false economic promises, betrays people’s aspirations and hides deeper social problems.