As India scrambles to fight Covid-19 and flatten the curve, a bleak and uncertain economy looms ahead. The International Monetary Fund (IMF) has downgraded India’s GDP growth to 1.9 per cent, Moody’s has pegged it at 0 per cent while others like Former Chief Economic Advisor Arvind Subramanian has painted an even bleaker picture, predicting negative growth in the near future for the Indian economy.
At the centre of all forecasts lies GDP, widely regarded as the primary indicator of a nation’s economic activity and recovery. But this notion is riddled with limitations. Less than a hundred years old in its present formulation, GDP or Gross Domestic Product aggregates the value of all final goods and services in the economy. Largely owing to it’s simplicity and ease of calculation it quickly emerged as the most popular yardstick for measuring the progress of a nation.
When growing international consensus emerged on the limitations of GDP, the Human Development Index (HDI) was developed in the 1990s to capture a more holistic picture. The HDI includes aspects related to overall human well-being, by using indicators on education and health. Since then, some countries have moved further ahead, for example Bhutan uses the Gross National Happiness Index and the US has created the Genuine Progress Indicator.
Newer formulations
Increasingly, these newer formulations go beyond economic metrics like consumption and investment, which have long been the focus of GDP calculations. These instead look at social well-being, welfare and happiness as a more fitting measure of countries’ overall progress and growth.
While this definitely presents a more holistic overview, social well-being is just one of the missing aspects of GDP calculations. Historically, GDP has also failed to include measures like environmental pollution and natural resource management or natural well-being, wealth distribution or inequality and other non-market transactions. These issues with the GDP were first raised by none other than Simon Kuznets, widely hailed as the architect of modern GDP.
However, most countries, including India, continue to stick with GDP and GDP growth as primary target variables. The Estimates Committee of Parliament in 2018 recommended changes in GDP calculation to include factors like environmental degradation and unpaid household work by women, but met with limited success.
It is often said that chaos precedes change. The current Covid-19 crisis thus presents a unique opportunity to re-imagine and redefine the status quo. While the GDP is bound to fall in the aftermath of the virus, it presents an incomplete picture. For example, many Indian cities have witnessed cleaner air, cleaner lakes and lower levels of pollution following the lockdown, which are contributors to a better quality of life. Such environmental indicators must find a place in mainstream calculations.
The Covid crisis has also thrown light on other glaring issues that have been left out of the GDP. The effects of the virus are being felt disproportionately by the informal sector — daily wage labourers and the migrant populations of cities, who have lost their livelihoods during the lockdown and are the worst hit by the economic contraction. This likely spike in inequality needs to be captured within the GDP, to ensure that it is an appropriate guide for recovery.
In the absence of correction metrics, the post-Covid rebuilding effort and attached government expenditure will push up the GDP, failing to account for the miseries caused by the pandemic.
Thus, a primary indicator of progress must go beyond purely economic factors like income and consumption and include various other indicators from sectors like education and health, related to overall well-being. In addition to presenting a complete picture of the economy and its population, it would also serve as an incentive to the government to attach greater weightage to such sectors which, as the Covid pandemic has demonstrated, remain inadequately equipped to handle such crises.
Bringing the social sector into focus also promises to bring issues like universal healthcare, quality education and gender equality into the popular political discourse of the nation, thus potentially garnering greater resources and political commitment.
Mental health
There are also other, more intangible metrics, that need accounting. Mental health is an important example. The effects of extended social isolation and stress during the lockdown could continue to plague many even in the post-pandemic world. Certain groups are at greater risk than others — for example, young adults, who face not just job uncertainty due to economic contraction, but also find their social lives upended by the newly emerging Work from Home (WfH) culture.
Therefore, it becomes important to capture metrics like overall mental well-being to gauge the damage and potential challenges emerging from the Covid crisis.
There are, of course, difficulties associated with such inclusions. A holistic metric that covers all these aspects accurately requires a lot of effort, ranging from reliable data to a willingness to change and move away from the traditional way of doing things. The post-Covid world offers such an opportunity. Instead of creating a brand-new indicator which would complicate comparisons with the past, the present GDP model could be expanded.
A quantitative variable adjusted GDP (Q-VAG) figure, using proxies like the Gini Coefficient for inequality, Air Quality Index for pollution levels, life expectancy and gender adjusted enrolment at various educational levels, etc., could be used. This serves a dual purpose — simplicity of updating past values, while also broadening the horizon of what comprises the progress of a nation. This should also open the door for further discussions in future, on including aspects of mental health and well-being by creating indicators like the Gross Happiness levels for India.
These are just a few recommendations to guide the future discourse on GDP as the primary indicator of the Indian economy. Innovative approaches need to be encouraged, debated and discussed to arrive at a solution that captures not just growth and recovery, but the overall pulse of the nation as we march towards the “new normal”.
Maulshree is a Research Fellow with the National Institute of Public Finance and Policy, and Parvathi is a Project Associate with the World Resources Institute India