From UPSC perspective, the following things are important :
Prelims level : GDP computation and various terminologies
Mains level : Growth vs Development debate
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.
- 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.