FALLACY OF GDP GROWTH AS DEVELOPMENT INDICATOR -

MEASURE ECONOMIC WELL-BEING

*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 civilization. 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 fact that the economy grew at 7.2 percent in the last fiscal despite the global economic slowdown. Exuding confidence that the growth may accelerate to 8 to 9 percent this year, he claimed that the economy is on course and everything is fine about it. The fetish of Gross Domestic Product (GDP) growth has been characteristic of Indian planning post the 1991 liberalization. Setting a target of 9 percent growth, the 11th Plan 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, un-employment, growing income inequality, and fiscal deficit, will show that the economy is in poor shape, and that the government is sweeping this fact under the carpet under the pretext that the GDP is growing, as if it is a panacea for all the ills of the economy.

The fetish of GDP growth as a measure of 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 onward, the government has poured billions of dollars into the economy. While this has contributed to the revival of the economy- the GDP grew by 0.9 percent 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 10percent of the workforce, causing serious distress to people. An Associated Press study of the spending surge of $ 20 billion for roads and bridges found that it had no effect on local employment other than 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 1970's, had constructed a Misery Index to measure the severity of the situation of poorly performing economies. The index took into account factors such as inflation and unemployment. The American Misery Index was highest at 21.8 percent in 1980 during Jimmy Carter's Presidency, a factor which led to his defeat. A recent computation of Misery Index by analysts at Moody, which also takes into account factors such as unemployment and fiscal deficit, shows that it was running at 11.8 percent in January 2010, 3 percentage points above the average and the highest since May 1991.

There is a reason why 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 profit motive and seek to maximize production and sale of goods and services. So long as production and sales are increasing, the GDP numbers would grow and keep the corporate and business sectors 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 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. The top 1 percent of the population in the US owns 40 percent of the nation's financial wealth; the bottom 80 percent owns just 9 percent. The Wall Street bankers appropriated for themselves a bonus of $ 20 billion in 2008, when the banks were being bailed out by State aid, which made President Obama to castigate them soon after taking office. Even as the banks started making profit late in 2009, the bankers resumed the practice of making payment of huge bonuses to themselves, prompting the British Prime Minister, Gordon Brown, to levy a special tax on them. The unions are outraged at the IBM boss being paid $ 21 million in 2009, when his firm had laid off 10000 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. The 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 a profound influence on world history. Today, the new mantra of progress is GDP growth. The GDP is basically a measure of a country's overall economic output, the market value of all final goods and services produced 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 the GDP counts armament production, wars and cigarette advertising as contributors to economic growth, while child-rearing, housekeeping and volunteer work are ignored. The economic value of health care is a classic example of the inadequacy of GDP as an index of progress- it may rise if many people are sick and receive expensive treatment, even though it is a symptom of the poor health of a nation and a cause for anxiety. A country may temporarily achieve a high GDP by overexploiting natural resources or misallocating investment. Economies experiencing an economic bubble, like the stockmarket bubble, or having a low private saving rate tend to appear to grow faster due to a 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 the 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 environmental degradation can have serious consequences for future generations. The GDP does not measure the sustainability of growth, nor the quality of life.

The Stiglitz Report

A commission, which was set up at the initiative of President Nicholas Sarkozy and included Nobel Prize winners Joseph Stiglitz and Amartya Sen and many other eminent economists as members, expressed severe dissatisfaction with the GDP as an indicator of economic and social progress (November 2009). The Commission recommended a shift from measuring economic production to measuring people's well-being. The Commission's advice can be summed up as follows:

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.

Give prominence to distribution of income, consumption and wealth. Broaden income measures to non-market activities, such as service received from family members. (The Commission noted that household production accounts for 35 percent of the conventionally measured GDP in France, 40 percent in Finland and 30 percent 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 organized 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 emphasized the importance of sustainable development and measuring environmental costs and proposed a new set of indices to measure them.

New Thinking on Growth

The Sustainable Development Commission of Britain has brought out a report Redefining Prosperity (March 2009), which says that pursuit of economic growth is the root cause of the current financial crisis and has contributed to the growing environmental crisis and undermined well-being in developed countries. Prof Tim Jackson, 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 2 percent of the global income. Even in developed countries, huge gaps remain in wealth and well-being between the rich and the 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, politicians panic and businesses struggle to survive.

The report pleads for fundamentally transforming the foundations of the economy. It suggests creating the conditions in which people can flourish- tackling systemic inequality, removing the incentives for unproductive competition for status, sharing the available work and improving work-life balance. There is a need to build a sustainable macro-economy, which is no longer structurally reliant on a 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. For creating a prosperous society, two objectives other than growth- sustainability and well-being- have to move up the agenda.

UNDP Human Development Index

The UNDP was the first prestigious international agency to recognize 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 promotes human development in all its dimensions, growth 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 the 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 the resources needed for the future generations.

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 index every year since 1990. Sadly, India's position has not improved significantly during the last two decades. It has been languishing in the company of the failed States of Africa and South Asia in the last quartile of the 175 States for which the HDI is being compiled.

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 in the form of non-renewable natural resources and the finite capacity of the Earth to absorb the emissions from agriculture and industry. In further studies over the next three decades, the analysts at the Club of Rome have emphasized that the world is in an overshoot phase. They have measured the ecological footprint of humanity and compared it to 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 and urban land) and absorb the emissions (carbon dioxide) of the global society. Sadly, today, even when humanity is already in unsustainable territory, the ecological footprint is still increasing. It can only be reduced by stabilizing the population, altering consumption norms and implementing 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 tends in the developed part of the world towards a slow population growth accompanied by a fast industrial growth, and in the developing world, towards a slow industrial growth and a fast population growth. But in both cases, the population and the physical capital keep growing. The growth in population and capital increases the ecological footprint of the economy. Once the footprint has reached beyond a sustainable level, as it already has, it must eventually come down- whether 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 modeling 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:

• Its rates of use of renewable resources do not exceed their rates of regeneration.

• Its rates of use of non- renewable resources do not exceed the rate at which sustainable new substitutes are developed.

• 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 kind 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." The Club of Rome suggests the following steps to move in the direction of sustainability:

• Extend the planning horizon.

• Improve the signals that monitor the real welfare of the human population and the real impact on the world eco-system.

• Speed up response time.

• Minimize the use of non-renewable resources such as fossil fuels and minerals.

• Prevent the erosion/loss 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.

• Use all resources with maximum efficiency.

• Slow and eventually stop exponential growth of population and physical capital.

The Club of Rome believes 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.

The Looming Ecological Disaster

The vast expansion of human economic activity in the world together with growth in population is proving disastrous to environmental sustainability. In a fifty year period from 1950 to 2000, while the global population jumped from 2.5 to 6 billion, oil production increased from 3800 to 27,600 million barrels per year, the number of registered vehicles from 70 million to 723 million and steel production from 185 million to 790 million metric tons per year. The huge growth in human activities has pushed the atmospheric carbon-dioxide level up by more than one-third and has accelerated the dangerous process of global warming and climate change. Jakarta emits more air pollution than human lungs can bear. The forests in Philippines are nearly gone. The cod fisheries of Newfoundland have nearly been closed. Every where 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 recognize that the human footprint has grown beyond a sustainable level. The NCR of Delhi is a classic example of demographic overload due to unchecked migration. A significant proportion of Delhi's population lives in pathetic conditions in slums bereft of basic amenities. The huge growth of vehicular traffic is polluting the atmosphere, causing lung diseases among school children. The heavy traffic on roads is resulting in unbearable snarls, which make commuting even a short distance a nightmarish experience. The most visible symbol of environmental degradation is the river Yamuna, an integral part of India's cultural history. Reduced to a drain,its water has been rendered unfit for human consumption due to the daily discharge of thousands of gallons of toxic industrial effluent. 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 realizing that we need to measure progress by improvement in wellbeing rather than expansion in market-based economic activity. Economic progress needs to be measured by the efficiency of resource use. We need to measure progress by how quickly we can build a renewable energy platform, meet basic human needs, discourage wasteful consumption, and renew rather than deplete our natural and cultural capital.

The World Watch Institute under the stewardship of John Talberth has developed a set of indicators balanced across economic, environmental and social domain to measure sustainable development for the 21st century. The index called Genuine Progress Indicator (GPI) is commonly referred to as "Green GDP". The 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. The GPI has the following macro-economic objectives:

1. Promoting genuine progress based on multiple dimensions of human well being. This includes aggregate index of life 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 i.e energy used per unit of output.

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

4. Protecting and restoring natural capital. If civilization 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 foot-print which compares the surface area of 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 localization. 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 a huge hidden cost.

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

Rethinking the Consumer Society

The conventional view that consumption is the route to human well-being has seriously been challenged. The World Value survey has found that in countries with average incomes in excess of $ 15000, there is virtually no correlation 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. 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 and community, determine 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 that cannot be reduced to a price have been marginalized. The continuing growth in production caused by excess consumption is fuelled by economic and social pressures. Advertising causes confusion between needs and wants in a consumer society. This growth outstrips eco-efficiency, causing rapid ecological deterioration. Competition undoubtedly has virtues and provides choice over goods and services, especially in developing countries, where people desire comforts. The consumer movement all over the world has empowered households to secure better value for money for the things they buy. Earlier, monopolistic suppliers had the liberty to supply outdated goods and inefficient services. The liberalization of the Indian economy in 1991 has allowed consumers a whole range of choices from fuel efficient cars to latest technology TVs, refrigerators and cell phones.

Consumerism is a two-edged sword. A society faces social instability when consumerism becomes a status symbol. A recent British Household Panel Survey found out that money can buy happiness only when one has a lot more than one's neighbours. The regret of being lower in the social pecking order tarnishes the satisfaction of being well off. Efficiency without sufficiency is counterproductive. We need to question the values that underpin a consumer culture and ask whether material values have overtaken life values, such as love, sharing and community spirit. The cost of consumerism includes stressful inducement to consume more, even if the quality of life declines. There is a need for balance between material values and life values. Mahatma Gandhi had said, `there is enough in the world for every one's need, but not for their greed'.

In developing countries like India, consumer culture is spreading fast as incomes rise. However, 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 a 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, rising sales of expensive cars, the culture of shopping malls and five star hotels, are obvious symbols of a rampant consumerism. Top cricketers today command crores of rupees as fees, thanks to an advertisement industry, which lures them to advertise products of dubious value. This promotes consumerism and creates dissatisfaction in the 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 Committee ( November 2009) appointed by the Planning Commission has come out with shocking estimates that the proportion of people below the poverty line is 37percent, and not 27 percent 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 urban areas and 2400 calories in rural areas) which was fixed some 35 years ago. Persons, whose consumption expenditure is less than Rs 447 per month in rural areas (Rs 15 per day) and Rs 579(Rs 19 per day) in urban areas, have been categorized as poor. On the basis of these new norms the percentage below the poverty line in rural areas is 42 percent and not 28percent, as was estimated earlier. There is not much change in the poverty line estimates in urban area at 26 percent. More than half the population is below the poverty line in States like Orissa (57percent) and Bihar (54percent), almost half in Chhattisgarh (49.4percent), MP (48.6percent) and Jharkhand (45.3percent) and over 40 percent in UP (40.9percent) and Tripura (40.6percent).

The National Commission for Enterprises in the Unorganised Sector (NCEUS), chaired by Arjun Sengupta, has found that 83.6 crore Indians are poor and vulnerable, living on less than Rs 20 per day and have not experienced any improvement in living standards since the early 1990's. Over thirty nine crore workers, constituting 86 percent of the working population, work under utterly deplorable conditions and have extremely few livelihood options. There is no job or social security for workers in unorganized 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 1950's and 1960's, have banished poverty and illiteracy. After six decades of independence this reflects sadly on our governance system.

Unemployment: The unemployment scene in the country is very grim. The 11th Plan (2007-12), has assumed an unemployment rate of 8.28 percent, and taken a figure of 3.84 crore unemployed during 2004-05, out of a total labour force of 41.96 crore, (38.49 crores employed, 27.80 crore in rural and 10.68 crore in urban areas). The employment figures are misleading. A vast majority of workers in the unorganized sector, which accounts for 92percent of the work force, are unskilled and grossly underpaid. .. Due to poverty they have been forced to engage in unremunerative work in order to generate even a miniscule amount of income. Sadly, the government statisticians have included them under the category of employed.. The real employment growth should be measured in terms of people employed in the organized sector, where employment is of high quality, employing skilled and educated work force, giving them some kind of job security and social security benefits. The 11th Plan mentions that as per NCEUS estimates (2004-05), only 3.34 crore people are working in the `organized' sector, and entitled to provident fund and social security. There has been no addition to jobs in this category in the last five years- as a matter of fact organized sector employment has decreased by 0.31percent from 1994. The `organized' sector in addition has employed 2.91 crore contract workers (bringing the overall employment in this sector to 6.25 crore, constituting 7.5percent of the work-force), but the contract labour actually forms a part of the informal sector. They may at best be termed as daily-wagers with no job and social security, and are vulnerable to exploitation.

A more rational test of the employment situation in the country is the level of unemployment of educated youth. According to an NSSO survey (2004-05), the unemployment rate among educated youth between the ages 15-29 is 12 to 14 percent. There has been no reduction in the unemployment rate among educated youth during the last five years. In the USA, an unemployment rate of 10percent has raised a nationwide fury. Due to the insensitiveness of policy makers, no eyebrows are raised at the huge, chronic educated unemployment in our country.

The 11th Plan has envisaged the creation of 5.8 crore new jobs in its five year period. Presumably, this addition will be in the organized sector. This would imply 150 percent growth over the existing level, simply a wishful thinking! The employment data is completely flawed. The unemployment rate is determined on the basis of NSO 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 the ability to create employment opportunities in the organized sector and among the 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 leading to social unrest. One of the main reasons for the growing income disparity is the discrepancy in investment between urban and rural areas. The investment pattern favours the better educated and better off urban population. Prof. Arjun Sengupta, Chairman of NCEUS, has observed, "The whole thrust of the economy caters to middle and higher income group that comprise 24 percent of the population numbering 22.5 crore". Studies by the Asian Development Bank (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 percent had 3 percent share of the national income, the richest 10 percent enjoyed a disproportionate 31 percent share. 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 population had its share of the global income reduced from 2.5 percent to 1.2 percent. This is largely due to the manner in which production and distribution are organized in capitalist free market economies, causing great resentment and dissatisfaction to large sections of society.

Inflation: 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 rise in the consumer price index (CPI) was 9 to 10 percent during 2008-09 and jumped to 15 to 17 percent in December 2009 as per official data. In December 2009, the inflation of food items was as high as 20 percent. There was an abnormal increase in prices of food items of mass consumption such as rice, wheat, pulses, vegetables and fruits, milk, tea and sugar. The Economic Survey attributes the high rate of inflation in 2008-9 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. Whatever be the reasons, the abnormal increase in food prices causes great hardship to people, specially the poor, who barely make the two ends meet. High inflation also reflects the failure of government policy. The Opposition has been making noises about the government's inability to check the rise in prices. At the time of presentation of the Budget, when petroleum prices were raised, they walked out of Parliament in protest. 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. For several decades, exports have been able to finance only about 70 to 80 percent of the country's import bill. The situation has further deteriorated in 2008-09, with exports earning of $ 189 billion, accounting for 60percent of the import bill of $ 308 billion. It is thanks to software exports ($ 45 billion) and NRI remittance ($ 42 billion) that we have a measure of stability on the foreign exchange front. The same trend continued in 2009-10. The current account balance, which was - 2.7 percent of the GDP in 2008-09, may cross - 3 percent in 2009-10. A huge trade imbalance shows that we are exporting jobs abroad and are unable to create a competitive economy and employment opportunities in the country.

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

In order to rein in government borrowing, Parliament enacted the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, which envisaged that the revenue deficit would be eliminated by 2008-9 and the fiscal deficit would be no more than 3 percent of the GDP. The government showed considerable fiscal prudence in the first few years after the passage of the FRBM Act, reducing the fiscal deficit to 2.7percent by 2007-08. However, from 2008-09 onwards, fiscal caution has been thrown to the winds on the pretext of providing a stimulus to the economy. Due to the sharp increase in expenditure, the fiscal deficit jumped to 6 percent of the GDP in 2008-09 and 6.7 percent in 2009-10. If we take the consolidated fiscal deficit of the Centre and the States, together with off-budget items, the combined fiscal deficit in the last two years is around 10.5 percent of the GDP. Despite the recession, the government gave a huge bonanza to government servants following the recommendations of the 6th Central Pay Commission. The annual salary bill of 33 lakh government servants has jumped from Rs 50,000 crore to 90,000 crore, having a cascading effect on the finances of autonomous institutions funded by government and the State governments, which usually adopt Central pay-scales. The government has made huge outlays on populist schemes, like NREGS (Rs 39100 crore in 2009-10 and Rs 41100 crore in 2010-11); Rural Housing ( Rs 8800 crore and Rs. 10,000 crore); Pradhan Mantri Gramin Sarak Yojna ( Rs 12000 crore for both the years); Drinking Water Supply ( Rs 8000 crore and Rs 9000 crore). Substantial hikes in the outlays of these schemes were made by the UPA government with an eye on the election in May 2009; the trend is being continued with other elections in view. The benefits of these programmes, which are poorly designed and suffer from huge leakages in implementation, do not reach the poor and the needy, whose plight has not improved after 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 his whole life. Human capability can improve only by provision of proper education and medical care.

Developing Human Capability- Education and health: It is now widely recognized that economic development should be people-centric. 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 for the 175 nations for which HDI is brought out every year and there is no significant improvement in its ranking 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. Neither does it build character, nor does it give emphasis on vocational training. As a result, we have a large number of unemployed educated youth. Most Indians have no access even to primary medical services, leave aside specialized medical treatment for serious diseases. This leads to heavy child and maternal mortality, malnutrition, poor health, suffering and loss of livelihoods. Lack of knowledge of family planning techniques leads to unwanted children and an unsustainable growth in population. The first pre-requisite for development is to give the right kind of education and provide 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, decisions will be wrong. A doctor measures several indicators, such as body temperature, pulse, blood pressure, sugar, cholesterol level, etc, before pronouncing his judgment 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:

• level of poverty;

• employment in organized sector, as well as of educated youths;

• income inequality;

• inflation;

• current account balance; and

• fiscal deficit.

The data about these parameters is already available in national account statistics, or can be easily constructed. In addition, we should measure human capability in terms of progress of literacy levels/ educational attainment and availability of basic health services, which are essential components of the economic wellbeing 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 pose the question: Growth of what? For whom? At what Cost? Paid for by whom? How much is enough? What are the obligations to share? We need to realize 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 blindly been imitating the Western economic model with all its attendant consequences. It is time we realized the serious limitations of this model. Much of the problem lies at the door of Western economists and their followers in India, who do not realize the limitations of their discipline. They seem to think that they have solutions to complex human problems. 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 diagnoses and solutions for the ills of the economy. This resulted in the current economic crisis and acute hardship for a large number of people in the US and across the globe.

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

It is time that we abandoned the model of blind pursuit of economic growth as a panacea for solving the economic ills of the country. It needs to be realized that GDP indicators are increasingly irrelevant, as they overlook the great humanitarian and environmental costs at which development takes place, mask the inequities in the distribution of income and fail to register the 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 wellbeing of the community.


* Dr. B.P. Mathur is former Dy. Comptroller and Auditor General and Former Director, National Institute of Financial Management, New Delhi. He is also closely associated with COMMON CAUSE

- Kamal Kant Jaswal

Oct - December, 2010