Home > Archives (2006 on) > 2010 > Fallacy of GDP Growth as a Measure of Economic Well-being

Mainstream, Vol XLVIII, No 22, May 22, 2010

Fallacy of GDP Growth as a Measure of Economic Well-being

Tuesday 25 May 2010, by B P Mathur

We have for over a century been dragged by the prosperous West behind its chariot, choked by the dust, deafened by the noise, humbled by our own helplessness, and overwhelmed by the speed. We agreed to acknowledge that this chariot-drive was progress, and the progress was civilisation. If we ever ventured to ask, ‘progress towards what, and progress for whom’, it was considered to be peculiarly and ridiculously oriental to entertain such ideas about the absoluteness of progress. Of late a voice has come to us to take count not only of the scientific perfection of the chariot but the depth of the ditches lying on its path.
— Rabindranath Tagore

The Finance Minister, while presenting the Budget for 2010-11, took credit for the economy growing at 7.2 per cent in the last fiscal year ending March 2010, despite the global economic slowdown, and exuded confidence that it may grow by eight to nine per cent this year, and claimed that the economy is on course and everything is fine about it. The fetish with Gross Domestic Product (GDP) growth has been characteristic of Indian planning post-1991 liberalisation. The 11th Plan has set a target of nine per cent growth and observes that the “economy is now at a point that it can achieve sustained economic expansion that has the potential to bring significant improvement in the lives of people”. A deeper examination of the fundamentals of the economy, such as level of poverty, unemployment, growing income inequality, and fiscal deficit, will show that the economy is in poor shape, and the government is sweeping this fact under the carpet, under the pretext that the GDP is growing, as if it is the sole panacea for all the ills of the economy.

The fetish of GDP growth as a measure of the economic health of a nation has been debunked by the recent experience of the USA and other developed countries. To fight recession, which has plagued the US from 2008 onwards, the government has poured billions of dollars in the economy. While this has somewhat helped in the revival of the economy, as the GDP grew by 0.9 per cent in last two quarters of 2009, it has not helped in solving the basic problems afflicting the country. The current unemployment rate is running as high as 10 per cent of the workforce, causing serious distress to the people, with the general masses getting disillusioned. An Associated Press1 study of spending surge of $ 20 billion for roads and bridges found that it had no effect on local employment except helping the beleaguered construction industry. The effect was so small, one economist compared it to trying to move the Empire State Building by pushing against it.

A US economist, Arthur Okun, who served in President Johnson’s Economic Council in the 1970s, had constructed a Misery Index to measure the severity of the poorly performing economies, and it took into account factors such as inflation and unemployment. The American Misery Index was highest at 21.8 per cent in 1980 during Jimmy Carter’s Presidency and led to his defeat. Recent computation of the Misery Index2 by analysts at Moody, which also takes into account factors such as unemployment and fiscal deficit, shows that it is running as high as 11.8 per cent in January 2010, three percentage points above the average, and the highest since May 1991.

There is a reason why the governments across the world, particularly in free-market economies, rely so much on GDP growth as a measure of prosperity and health of the economy. In developed countries the corporate sector plays a crucial role in deciding government policies. They are driven solely by the motive to make profit. This they can do by maximising production and sale of goods and services. So long as production and sales are increasing, the GDP number would grow and keep the corporate and business sector happy. In the US, the largest Fortune 500 companies account for over half the gross domestic product. The corporate executives appropriate most of the profit to themselves, sharing very little with workers who are equal partners in wealth creation. This trend is growing over the last three decades as the workers’ wages have remained stagnant despite rising labour productivity. In 1980, the CEO of a typical major corporation received 42 times the compensation of an average factory worker by the end of 2000 it was a whopping 475 times more.3 The top one per cent of the population in the US owns 40 per cent of the nation’s financial wealth, the bottom 80 per cent owning just nine per cent. The Wall Street bankers appropriated for themselves a bonus of $ 20 billion in 2008, when the banks were being bailed out by state aid, and this made President Obama to castigate them soon after taking office. Even as banks have started making profit in late 2009, the bankers have again started making payment of huge bonuses to themselves, which prompted the British Prime Minister, Gordon Brown, to levy special tax on it. Unions are outraged4 at the IBM boss being paid $ 21 million in 2009, when his firm laid off 10,000 American workers in the previous year due to recession. This wide disparity in income, amidst high unemployment, causes unhappiness amongst a vast majority of people. Philosopher Alain de Boton has shown how an unequal society leads to high levels of “status anxiety” amongst its citizens. Striving for self-esteem through material wealth appears to be a kind of zero-sum game in which the constant need for betterment and approval only serves to entrench people in an almost neurotic spiral of consumption.

GDP—an Inadequate Measure

The way societies have defined and measured progress has had profound influence on world history. Today the new mantra of progress is Gross Domestic Product (GDP) growth. The GDP is basically a measure of a country’s overall economic output—the market value of all final goods and services made within the borders of a country in a year. The GDP ignores the environment, home production for self-use and domestic work. The current system of measuring GDP counts armament production, wars and cigarette advertising as contributors to economic growth, while child rearing, house-keeping and volunteer work are ignored. The economic value of health care is a classic example of GDP as a wrong index of progress—it may rise if many people are sick and receive expensive treatment, but is a symptom of the poor health of a nation and a cause for anxiety. A country may achieve temporarily a high GDP by over-exploiting natural resources or misallocating investment. Economies experiencing an economic bubble, like stock–market bubble or low private saving rate, tend to appear to grow faster due to higher consumption, mortgaging future growth for the present. The GDP does not take into account the black market, where the money spent is not registered, and non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. Economic growth at the expense of environ-mental degradation can have serious conse-quences for future generations. The GDP does not measure the sustainability of growth nor the quality of life.

Stiglitz Report

A Commission,5 which included Nobel-Prize winners Joseph Stiglitz and Amartya Sen, along with many eminent economists as members, set up at the initiative of French President Nicholas Sarkozy, has expressed severe dissatisfaction with GDP as an indicator of economic and social progress (November 2009). The Commission has recommended a shift from measuring economic production to measuring people’s well-being. The Commission observed: (i) When evaluating material well-being, look at income and consumption rather than production. The GDP only measures market production in money units. Production may expand, while income may decrease. (ii) Give prominence to distribution of income, consumption and wealth. (iii) Broaden income measures to non-market activities, such as service received from family members. It noted that household production accounts for 35 per cent of the conventionally measured GDP in France, 40 per cent in Finland and 30 per cent in the USA.

The Commission observed that well-being is multi-dimensional and should include: (i) material living standards—income, consumption, wealth; (ii) health; (iii) education; (iv) personal activities including work; (v) political voice including governance; (vi) social connections and relationships; (vii) environment; (viii) insecurity, economic as well as physical. The quality of life depends on the objective conditions and opportunities available to people. How societies are organised makes a difference to people’s lives, as can be seen in measures of people’s health and education, their daily work and leisure activities, citizens’ political participation and responsiveness of institutions, people’s social connections and their environmental conditions and physical and economic insecurity that shapes their lives. The Commission emphasised the importance of sustainable development and measuring environment cost and proposed a new set of indices to measure it.

New Thinking on Growth

The Sustainable Development Commission of Britain has brought out a report, Redefining Prosperity,6 (March 2009), which says that pursuit of economic growth is the root cause of the current financial crisis as well as contributing to growing environmental crisis and undermining well-being in developed countries. Prof Tim Jackson, the SDC’s Economics Commissioner, says: “For millions in developing countries, growth is clearly still vital to deliver basic standards of living and well-being. But, in developed countries including the UK, far from increasing prosperity, our debt-driven consumption has created an unstable system which has put jobs and livelihoods at risk, as well as damaging us psychologically and socially.” The report shows that economic growth has delivered its benefits at best unequally, with a fifth of the world’s population earning just two per cent of the global income. Even in developed countries, huge gaps remain in wealth and well-being between the rich and poor. The reliance on debt to finance the cycle of growth has created a deeply unstable system which has made individuals, families and communities inherently vulnerable to cycles of boom and bust, while increasing consumption does not make people happier. When growth falters the politicians panic and businesses struggle to survive.

The report pleads for fundamentally trans-forming the foundations of the economy. It suggests creating the conditions in which people flourish—tackling systemic inequality and removing incentives for unproductive status competition; sharing available work and improving work-life balance. There is a need to build a sustainable macro-economy which is no longer structurally reliant on the culture of consumerism. There should be an awareness of ecological limits at the heart of economic decision-making. The Commission observes that prosperity has to go beyond material pleasure. Two objectives other than growth—sustainability and well-being—have to move up the agenda for creating a prosperous society.

UNDP—Human Development Index

The UNDP was the first prestigious international agency to recognise that GDP growth is meaningless if it does not improve the quality of people’s lives. It laid down the criteria of “good” economic growth—that which promotes human development in all its dimension. Growth7 that generates full employment and security of livelihoods; fosters people’s freedom and empowerment; distributes benefits equitably; promotes social cohesion and cooperation and safeguards future human development. The UNDP faulted the current obsession with GDP growth which is leading to:

• Jobless growth—where the overall economy grows but does not expand opportunities for employment.

• Ruthless growth—where the fruits of economic growth mostly benefit the rich.

• Voiceless growth—where growth in the economy has not been accompanied by an extension of democracy or empowerment.

• Rootless growth—where growth causes people’s cultural identity to wither.

• Futureless growth—where the present generation squanders resources needed for the future generation.

The UNDP has constructed a Human Development Index (HDI) which compares country achievements across the most basic dimension of human development and takes into account literacy level, longevity and GDP adjusted to Purchasing Power Parity (PPP). The UNDP has been bringing out the HDI every year since 1990. Sadly, India’s position, which has been in the last quartile of 175 states for which the HDI is being compiled, in the company of many of the failed states of Africa and South Asia, hasn’t moved significantly up during the last two decades of its existence.

Limits to Growth—the Club of Rome

Since 1972, the Club of Rome has been in the forefront, of the movement which has been pointing out that there are ecological constraints in the existing development pattern, and focused on the planet’s physical limit in the form of depletable natural resources and the finite capacity of the Earth to absorb emissions from agriculture and industry. In further studies over the next three decades, the analysts at the Club of Rome8 emphasise that the world is in an overshoot phase. They have measured the ecological footprint of humanity and compared it with the “carrying capacity” of the planet. The ecological footprint can be defined as the land area that would be required to provide the resources (grain, feed, wood, fish, urban land) and absorb the emissions (carbon dioxide) of global society. Sadly today, even when humanity is already in unsus-tainable territory, the ecological footprint is still increasing. The ecological footprint could be reduced by stabilising the population, altering the consumption norms and implementing the resource-efficient technologies.

The Club of Rome notes that exponential growth of the population and industrial production is built into the self-generating structure of the global economy. It swings in the developed part of the world towards slow population growth accompanied by fast industrial growth, and in the developing world towards slow industrial growth and fast population growth. But in both cases population and physical capital keep growing. The growth in population and capital increases the ecological footprint of the economy. Once the footprint has reached beyond the sustainable level, as it already has, it must eventually come down—it must come down through a managed process or through the work of nature. The Club of Rome pleads for a managed process to limit growth and projects different scenarios through computer modelling to drive home its point.

What we need to do is to move towards a sustainable society. A sustainable society is one that has in place informational, social and institutional mechanism to keep in check exponential population and capital growth. To be sustainable the economy’s throughputs would have to meet three conditions: (a) its rates of use of renewable resources do not exceed their rates of regeneration; (b) its rates of use of non-renewable resources do not exceed the rate at which sustainable new substitutes are developed; (c) its rates of pollution emission do not exceed the assimilation capacity of the environment.

Sustainability does not mean “zero-growth”. “A sustainable society would be interested in qualitative development, not physical expansion. It would use material growth as a considered tool, not a perpetual mandate. Neither for nor against growth, it would begin to discriminate among kinds of growth and purposes of growth. It would even entertain rationally the idea of purposeful negative growth, to undo excess. To get below limits, to cease doing things that, in full accounting of natural and social costs actually cost more than they are worth.”9 The Club of Rome suggests several steps to move in the direction of sustainability. (i) extend the planning horizon; (ii) improve the signals that monitor the real welfare of the human population and the real impact on the world eco-system; (iii) speed up response time, look actively for signals that indicate when the environment or society is stressed; (iv) minimise the use of non-renewable resources such as fossil fuels and minerals; (v) prevent the erosion of non-renewable resources; the productivity of soils, surface waters, re-chargeable ground waters, and all living things including forests, fish, and game should be protected, restored and enhanced; (vi) use all resources with maximum efficiency; (vii) slow down and eventually stop the exponential growth of population and physical capital. The Club of Rome underlines that to attain sustainability the most important step is to secure cultural commitment to remove poverty and unemployment and to meet non-material needs such as community, identity, self-esteem, love and joy etc.

The Looming Ecological Disaster

The vast expansion of human economic activity in the world together with growth in population is proving disastrous to environmental sustaina-bility.10 In the fifty-year period from 1950 to 2000, while the global population jumped from 2.5 trillion to six trillion, oil production increased from 3800 million barrels per year to 27,600, registered vehicles from 70 million to 723 million and steel production from 185 million metric tonnes per year to 790. The huge growth in human activities has pushed the atmospheric carbon dioxide up by more than one-third and has started the dangerous process of warming the planet and climate change. Everywhere the earth’s ice fields are melting. The current global industrial system is leading us to a situation where we are running out of resources that support life such as clean air and drinking water.

Many people recognise at the local level that the human footprint has grown beyond the sustainable level. Jakarta emits more air pollution than the human lungs can bear. The forests in the Philippines are nearly gone. The cod fisheries of Newfoundland have almost been closed. The NCR of Delhi is a classic example of the unsustainable growth of a fast expanding metropolis. Delhi is bursting at the seams with the population growing to over 12 million due to unchecked migration, with a vast majority of people living in pathetic conditions in slums with no basic amenities. The huge growth of vehicular traffic is polluting the atmosphere, causing lung diseases to school children, and the heavy traffic on roads is resulting in unbearable snarls taking hours to commute a short distance. The most visible symbol is the pollution of river Yamuna, an integral part of India’s cultural history, which has been reduced to a nallah and its water unfit for human consumption due to thousands of gallons of toxic industrial effluent discharged into it everyday. The quality of life in Delhi has fast deteriorated over the last three decades. The looming environmental disaster has led people to question the very rationale of growth.

Genuine Progress Indicator

Social scientists all over the world are realising that we need to measure progress by improve-ment in well-being rather than expansion in market based economic activity. Economic progress needs to be measured by how little we can consume and achieve a high quality of life. We need to measure progress by how quickly we can build a renewable energy platform, meet basic human needs, discourage wasteful consumption, and invest rather than deplete natural and cultural capital.

The World Watch Institute, under the stew-ardship of John Talberth,11 has developed a set of indicators balanced across economic, environmental and social domains to measure sustainable development for the 21st century. The index is called Genuine Progress Indicator—GPI. GPI adjusts a nation’s personal expenditure upward to account for the benefits of non-market activities such as volunteering and parenting and downward to account for costs associated with income inequality, environmental degradation and international debt. GPI has the following five macro-economic objectives:

1. Promoting genuine progress based on multiple dimensions of human well-being. This includes aggregate index of life’s well-being based on life satisfaction, life expectancy, health, education, income, knowledge, community etc.

2. Fostering a rapid transition to a renewable energy platform. This includes carbon foot-prints which provides for spatial and intensity measures of life cycle carbon emissions and energy intensity, that is, energy used per unit of output.

3. Equitable distribution of both resources and opportunities. GINI coefficient measures the extent to which income distribution deviates from an equitable distribution norm.

4. Protecting and restoring natural capital. If civilisation is to survive, it must live on interest, not on the capital of nature. Nature’s interest is the flow of goods and services received from stocks of natural capital. Ecological footprint, which compares the surface area of the Earth needed to sustain current consumption patterns and absorb waste, is the best measure of natural capital depletion. When the footprint exceeds biological capacity, the world is engaged in unsustainable ecological overshoot and depletion of natural capital.

5. Economic localisation: It is the process by which a region, country or city frees itself from over-dependence on the global economy and invests in its own resources to produce a significant portion of the goods, services, food, energy it consumes from its local endowment of financial, natural and human capital. The present global distribution system is based almost exclusively on cheap fossil fuel, with huge hidden cost.

A break-down of GPI contributions and deductions for the USA for the year 2004 shows that GDP of $ 10.8 trillion, gets reduced to GPI of $ 4.4 trillion, implying that well over half the economic activity in the United States was unsustainable and did not contribute to genuine progress. This implies that after a particular threshold, environment and social costs of economic growth are more than offset by rising environment and social costs.

Rethinking the Consumer Society

The conventional view that consumption is the route to human-well being has been seriously challenged. The World Value Survey12 has found that in countries with average incomes in excess of $ 15,000, there is virtually no co-relationship between increased income and life satisfaction. Real income per-head has tripled in the USA since 1970, but the percentage of people reporting themselves to be happy has declined since 1970. In Japan, there has been little change in life satisfaction over several decades. In the UK, the percentage reporting themselves as very happy dropped from 52 in 1957 to 36 today. Studies have shown that a whole range of non-monetary factors such as family, friendship, health, peer approval, community, purpose, determine people’s life satisfaction and happiness. Unequal societies systematically report higher levels of ‘distress’ than more equal ones.

Today consumerism has become a transactional way of life—everything has been reduced to a price and things which cannot be reduced to a price have been marginalised. The continuing growth in production inputs caused by excess consumption is fuelled by economic and social pressures and advertising causes confusion between the needs and wants in a consumer society. This growth outstrips eco-efficiency, causing rapid ecological deterioration. There is no doubt virtue in competition and choice over goods and services, especially in developing countries where people are wanting to lead a comfortable life. The consumer move-ment all over the world has empowered households to secure better value for money for the things they buy. No one will prefer shoddy, outdated goods and disdainful and inefficient services which characterised those provided by monopolistic suppliers, either in the public or private sector. The liberalisation of the Indian economy in 1991 has allowed the consumers a whole range of choice from fuel efficient cars, to latest technology TV, refrigerator and cell-phone.

Consumerism is a two-edged sword. A society faces social instability when consumerism become a status symbol. A recent British House-hold Panel Survey13 found out that money can buy out happiness only when he or she has a lot more than neighbours. The envy of being lower in the social pecking order tarnishes
the satisfaction of being well-off. Efficiency without sufficiency is counter-productive. We need to question the values that underpin a consumer culture and ask whether material values have overtaken life-values, such as love, sharing, community spirit. The cost of consumerism includes stressful inducement to consume more even if the quality of life declines. There is need for balance between material values and life values. Mahatma Gandhi had said: ‘There is enough in the world for everyone’s need, but not for their greed.’

In developing countries like India, the consumer culture is spreading fast as income rises. How-ever, the benefits of economic growth are unevenly distributed. According to Forbes, the number of billionaires in India doubled to 52 in 2009, their combined net worth reached $ 276 billion or a quarter of the country’s GDP. The disparity in wealth with the large part of it being cornered by a privileged section of society is leading to conspicuous consumption. The springing up of luxury villas all over the country, the rising sale of expensive cars, the culture of the shopping malls and five-star hotels are obvious symbols of fast-spreading consumerism. Top cricketers command crores of rupees as fees, thanks to the advertisement industry which lures them to advertise products of dubious value, promoting consumerism and creating dissatisfaction in a vast majority of people who cannot afford them.

India—Measuring Economic Well-being

If we have to judge whether people are really making genuine progress and are economically better-off, we have to take into account a number of factors as discussed below.

Level of Poverty: The Suresh Tendulkar Committee14 (November 2009), appointed by the Planning Commission, has come out with shocking estimates that the number of people below the poverty line is 37 per cent and
not 27 per cent as was estimated earlier. The Committee has taken the household consumption of goods and services, which includes food, education and health, as the norm to determine the poverty line, instead of the existing norm of calorie intake (2100 calories in the urban areas and 2400 calories in the rural areas) which was fixed some 35 years ago. Persons whose consumption expenditure is less than Rs 447 per month in the rural areas (Rs 15 per day) and Rs 579 (Rs 19 per day) in the urban areas have been categorised as poor. On the basis of new norms the number below the poverty line in the rural areas is 42 per cent and not 28 per cent as was estimated earlier, though there is not much change in the poverty line estimates in the urban areas at 26 per cent. More than half the population is below the poverty line in States like Orissa (57 per cent) and Bihar (54 per cent), almost half in Chhattisgarh (49.4 per cent), MP (48.6 per cent) and Jharkhand (45.3 per cent) and over 40 per cent in UP (40.9 per cent) and Tripura (40.6 per cent).

The National Commission for Enterprises in the Unorganised Sector15 (NCEUS), chaired by Dr Arjun Sengupta, has found that 83.6 crore Indians are poor and vulnerable, living on less than Rs 20 per day and experienced hardly any improvement in the living standards since the early 1990s. As many as 39.49 crore workers, who constitute 86 per cent of the working population, work under utterly deplorable conditions and extremely few livelihood options. There is no job or social security to workers in the unorganised sector. India’s growth story has bypassed the unorganised sector from agriculture to micro-industries to self-employment. Many countries in East and South Asia, which had the same level of economic development as India in the 1950s and 1960s, have banished poverty and illiteracy. This is a sad reflection on our governance system six decades after independence.

Unemployment: The unemployment scene in the country is very grim. The 11th Plan (2007-12), has assumed an unemployment rate of 8.28 per cent, and taken a figure of 3.84 crore unemployed during 2004-05; out of a total labour force of 41.96 crores, 38.49 crores are employed, 27.80 crores in the rural and 10.68 crores in urban areas. The employment figures are misleading. As many as 92 per cent of the labour force is employed in the unorganised sector on non-skilled jobs at whatever wages they can get instead of sitting idle at home, which is captured as ‘employment’ by government statisticians. The real employment growth should be measured in terms of people employed in the organised sector where employment is of high quality, employing skilled and educated force, giving them some kind of job security and social security benefits. The 11th Plan mentions that as per the NCEUS estimates (2004-05), only 3.34 crore people are working in the ‘organised’ sector, and entitled for PF and social security. There has been no addition to jobs in this category in the last five years—as a matter of fact the organised sector employment has decreased by 0.31 per cent from 1994. The ‘organised’ sector, in addition, has employed 2.91 crore people bringing the overall employment in this sector to 6.25 crores, constituting 7.5 per cent of the workforce, but they are all in the informal sector in what may be termed daily wagers with no job and social security, which shows how labour is being exploited.

A more rational test of the employment situation in the country is the employment of the educated youth. According to the NSSO survey (2004-05), the unemployment rate among the educated youth in the 15-29 age-group is 12 to 14 per cent. There has been no reduction in the unemployment rate among the educated youth during the last five years—it was estimated to be between 11 to 14 per cent during 1999-2000. In the USA, an unemployment rate of 10 per cent has raised a nationwide fury. Due to the insensitivity of the policy-makers, no eyebrows are raised at the huge educated unemployment in our country persisting over decades.

The 11th Plan has envisaged 5.8 crore new job creation in the five-year period. Presumably this is in the organised sector. This would imply 150 per cent growth over the existing level, simply a wishful thinking! The employment data is completely flawed. The unemployment rate is determined on the basis of the NSSO survey which is done once in five years. In the USA the employment rate is tracked every month. The real test of good economic policy is to create employment opportunities in the organised sector and among educated youth. The government has completely failed on this front.

Income Inequality: One of the disquieting things about the economic growth that is taking place in the country is the vast income inequality it is creating, causing social unrest. One of the main reasons for the growing income disparity is discrepancy in investment between the urban and rural areas, which favours the better-educated, better-off urban population. Dr Arjun Sengupta,16 the Chairman of the NCEUS, observed: “The whole thrust of the economy caters to the middle and higher income group that comprise 24 per cent of the population numbering 22.5 crores.” Studies by the ADB show that during the last two decades income inequalities have vastly increased in our country. According to the UNDP Human Development Report 2007-08, while the poorest 10 per cent had three per cent share of the national income, the richest 10 per cent enjoyed a disproportionate 31 per cent share in India. The Gini coefficient, which measures relative inequality, stood at 36.8 and has been showing a rising trend. The rise in inequality is a global trend. An ADB study of 15 Asian countries (2007) noted that income inequality has increased in all the countries, with China recording the highest disparity. According to the World Bank, from 1980 to 2000 the bottom quartile of the world people found that their share of global income fell from 2.5 per cent to 1.2 per cent. This happens largely due to the manner in which production and distribution are organised in the capitalist, free-market economies, causing great resentment and dissatisfaction to large sections of society.

Inflation, which measures the general rise in prices against a standard level of purchasing power, has been plaguing the Indian economy for the last two years. The consumer price index (CPI) was nine to 10 per cent during 2008-09 and jumped to 15 to 17 per cent in December 2009 as per the official data.17 In December 2009, the inflation of food items was as high as 20 per cent. There was an abnormal increase in the prices of food items of mass consumption such as rice, wheat, pulses, vegetables and fruits, milk, tea, sugar etc. The Economic Survey attributes inflation in 2008-09 to the increase in international fuel and commodity prices and in the second half of 2009-10 to the shortfall in agriculture production due to deficient rains and failure of monsoon. Whatever be the reasons, the abnormal increase in food prices causes great hardship to people, specially the poor, who are barely able to make two ends meet. The high inflation reflects failure of the government’s policy. The Opposition has been making noises about the government’s inability to check the rise in prices and walked out of Parliament in protest at the time of presentation of the Budget when petroleum prices were raised. Inflation is the only major economic policy issue which has received nationwide attention.

Current Account Balance: On the external front India suffers from a huge trade imbalance and for several decades exports have been able to finance only about 70 to 80 per cent of the country’s import bill. The situation has further deteriorated in 2008-09, with export earnings of $ 189 billion, constituting 60 per cent of the import bill of $ 308 billion. It is due to software exports ($ 45 billion) and NRI remittances ($ 42 billion) that we have a measure of stability on the foreign exchange front. The same trend has continued in 2009-10. The current account balance, which was 2.7 per cent of the GDP in 2008-09, may cross three per cent in 2009-10. A huge trade imbalance implies we are exporting jobs abroad, and unable to create a competitive economy and employment opportunities in the country.

Fiscal Deficit: The government’s finances are under severe strain. In order to give fiscal stimulus to the economy, following global recession in late 2008, the government has gone into a huge spending spree.18 From a level of Rs 7.12 lakh crores (2007-08), the government expenditure has ballooned to Rs 10.21 lakh crores (2009-10)—a jump of 43 per cent in two years time. Much of it is financed by borrowings. Borrowings in 2009-10 amounted to over Rs 4 lakh crores, which met 40 per cent of government expenditure. The same trend is continuing in the Budget for 2010-11. Heavy borrowing results in huge interest liability—38 per cent of revenue receipts of the Central Government have gone towards interest payment in 2009-10. A large part of the public debt is spent on revenue expenditure, violating the basic canons of public finance, leaving very little for capital expenditure and infrastructure development. In 2009-10 only Rs 1.15 lakh crores had been earmarked for capital expenditure—just 12 per cent of the total expenditure.

In order to rein in government borrowings, Parliament had enacted the Fiscal Responsibility and Budget Management Act in 2003, which had envisaged that the revenue deficit will be eliminated and the fiscal deficit will be no more than three per cent of the GDP by 2008-09. The government showed considerable fiscal prudence for the first few years of the passing of the FRMB Act and had reduced the fiscal deficit to 2.7 per cent in 2007-08. However, from 2008-09 onwards the fiscal caution has been thrown to the winds under the guise of giving stimulus to the economy. Due to increase in expenditure, the fiscal deficit jumped to six per cent of the GDP in 2008-09 and 6.7 per cent in 2009-10. If we take the consolidated fiscal deficit of the Centre and the States, together with the off-Budget items, the combined fiscal deficit is around 10.5 per cent of the GDP in the last two years. Despite recession, the government gave a huge bonanza to the government servants, following the recommendations of the Sixth Pay Commission. The annual salary bill of 33 lakh government servants has jumped from Rs 50,000 crores to Rs 90,000 crores, with a cascading effect on the finances of autonomous institutions funded by the government, pension liability and the State governments, who mostly adopt Central pay-scales. The government has made huge outlays on populist schemes like the NREGS (outlay Rs 39,100 crores in 2009-10 and Rs 41,100 crores in 2010-11); Rural Housing (Rs 8800 crores and Rs 10,000 crores); Pradhan Mantri Gramin Sarak Yojna (Rs 12,000 crores for both the years); Drinking Water Supply (Rs 8000 crores and Rs 9000 crores). Substantial hike in the outlays of these schemes was made by the UPA Government with an eye on elections in May 2009, and these are being continued with the subsequent State and Central elections in view. Poorly designed with large leakages in the implementing machinery, the benefits of these programmes do not reach the poor and the needy, and their plight has not improved despite several decades of economic planning. Most of these schemes are in the nature of ‘doles’ and do not increase human capability. There is an old saying: give a man a fish and he has food for a day, but give him a fishing rod and he has livelihood for the whole life. Human capability can improve only by provision of proper education and medical facility.

Developing Human Capability—Education and Health: It is now widely recognised that economic development should be people-centred, for which it is necessary to develop human capability in terms of education, health and skills. The UNDP in its Human Development Report has developed a composite index of achievement in basic human capabilities in three fundamental dimensions—a long and healthy life, knowledge and a decent standard of living. These three variables represent life expectancy, educational attainment and income. India continues to be in the bottom quartile of the 175 nations for which the HDI is brought out every year and there is no significant improvement over the last two decades. India’s education and health delivery systems are pathetic. One-third of Indians are illiterate and another third semi-literate with no worthwhile skills. The education system is seriously flawed, does not build character nor gives emphasis on vocational training resulting in vast unemployment of the educated youth. Most Indians have no access to even primary medical services, leave apart specialised medical treatment for serious diseases. This leads to heavy infant mortality, maternal death, malnutrition, and unwanted children for want of knowledge of family planning techniques, besides poor health, suffering and loss of livelihood of people who fall sick. The first prerequisite for development is to give the ‘right kind of education’ and make provision of basic health services so that each and every Indian has the wherewithal to lead a healthy, fulfilling life.

Developing a New Matrix

We need a proper matrix to measure economic performance. If our measurements are flawed, the decisions will be wrong. A doctor measures several indicators such as body temperature, pulse beat, blood pressure, sugar, cholesterol level etc. before pronouncing his judgement on the health of an individual. Similarly in addition to income growth, we need to measure several parameters, to get an idea of the health of the economy: (i) level of poverty; (ii) employment in the organised sector, as well as of educated youth; (iii) income inequality; (iv) inflation; (v) current account balance; and (vi) fiscal deficit. The data about these parameters is already available in the national account statistics or can be easily constructed. In addition, we should measure human capability in terms of progress of (vii) literacy levels/educational attainment, and (viii) availability of basic health services which are the essential components of the economic well-being of a society.

For the last five decades the pursuit of growth has been the single most important policy goal across the world. As rightly observed by the Club of Rome, we need to put the question: Growth of what? For whom? At what cost? Paid by whom? How much is enough? What are the obligations to share? We need to realise that an economic model based on relentless consumerism is fundamentally flawed and is responsible for the current global economic crisis as well as the ecological and social problems that we are facing. India has been blindly imitating the Western economic model with all its attendant conse-quences. It is time we realise the serious limitations of this model. Much of the problem lies at the door of the Western economists and their followers in India, who do not realise the limitations of their discipline, and seem to think they have solutions to solve the complex problems of human beings. Paul Krugman, the Nobel-Prize winner economist, has observed that the last twenty years have been wasted years for the profession of economists as they came out with wrong diagnosis and solutions for the economy the resulted in the current economic crisis and hardships for a large number of people in the US and across the globe.

India’s ancient wisdom and tradition offers insights into some of the complex problems that we are facing today. Mahatma Gandhi invoked the spirit of swadeshi and gram-swaraj—localisation of production and inclusive growth, and propounded the philosophy of ‘simple living and high thinking’. India’s spiritual tradition, while it accepts the need for earning wealth, enjoins people to practise moderation in consumption and be of service to the society— lok-sangraha. Ishavasya Upanishad says: ten tyakten bhunjitha, ma gridha kasya swidhanah: enjoy wealth but remain detached and use it for noble purposes. It is gratifying that think-tanks in the West, such as the UNDP, Club of Rome, British Sustainable Development Commission, the World Watch Institute, propound a philosophy of reducing consumption and ostentatious living, which is in synergy with India’s spiritual tradition.

It is time we abandon the model of blind pursuit of economic growth as a panacea of solving the economic ills of the country. It needs to be realised that GDP indicators are increasingly irrelevant and out of touch with great humanitarian and environmental costs at which development takes place and mask inequities in the distribution of income and fail to register declines in well-being that stem from the loss of community, culture and environment. We need to develop a new matrix of economic well-being in which progress is measured in terms of development of human capability, equitable distribution of income and wealth, with due weight given to ecological sustainability and social well-being of the community. n


1. Bay Area News, San Francisco, January 12, 2010.

2. Business Week, January 18, 2010; Catherin Rampell: ‘A New Misery Index’.

3. Ira Katznelson, Mark Kesselman, Alan Draper, Thomson Wadsworth: The Politics of Power (Belmont, CA, USA, 2006).

4. The Economist, March 13-19, 2010.

5. “Commission on the Measurement of Economic and Social Progress”: Chairman, Joseph Stiglitz; Amratya Sen, Adviser; Fitoussi Coordinator. Website: www.stiglitz-sen-fitoussi

6. UK, Sustainable Development Commission: Prosperity without Growth; www.sd-commission.org.uk

7. UNDP: Human Development Report 1996, pp. 43-65.

8. Donella Meadows, Jorgen Randers, Dennis Meadows: ‘Limits to Growth—The 30 Year Update’ (Earthscan, London, 2005).

9. Ibid., p. 255.

10. For a detailed discussion see, Peter Senge: The Necessary Revolution (Double Day, New York, 2008); and James Gustave Speth: The Bridge at the Edge of the World—Capitalism, The Environment, and the Crossing from Crisis to Sustainability (Yale University Press, New Haven, 2008).

11. John Talbert: ‘A New Bottom Line of Progress’ in World Watch Institute: State of the World 2008.

12. Tim Jackson: ‘The Challenge of Sustainable Lifestyles’ in World Watch Institute: State of the World 2008.

13. Report in The Times of India, New Delhi, March 24, 2010, p. 21

14. Government of India, Planning Commission: Report of the Expert Group to Review the Methodology of Estimating Poverty, November 2009.

15. Ministry of Labour: National Commission in the Unorganised Sector.

16. Interview given to Infochange in September 2007; www.infochange.org

17. Economic Survey 2009-10, pp. 63-75.

18. Government of India, Budget 2009-10 and 2010-11.

Dr B.P. Mathur is a former Deputy Comptroller and Auditor General and Director, National Institute of Financial Management. He has been a Visiting Faculty at several national level Institutes and has authored several books and the large number of articles on Economics, Finance and Public Management related issues.

ISSN : 0542-1462 / RNI No. : 7064/62