KPIT Cummins Blog

“Violent hurricanes are good for the economy. So are cancer, divorce and war.” A dilettante economist, inspired by Jack Hough, Vidhi Chandra from KPIT Cummins, explores the hidden side of India’s GDP growth. 

The Indian economy is the 11th largest in the world by nominal GDP and the 4th largest by Purchasing Power Parity (PPP). What’s more, the Indian economy is on a power-roll as many economists have pegged its growth rate to surpass 9% in 2011.

Incredible !ndia

While all these numbers seem ideal for a classic growth story, a poignant fact that keeps coming back to my mind is that India is still home to a third of the world’s poor. World Bank estimates, 80% of India's population lives on less than $2 a day. Further, as per the data released on February 10, 2011, food inflation stood at 13.07 per cent at the end of January 2011.

Never mind. The Indian economy will continue to boom because more people in India have mobile phones than access to basic necessities and sanitation.

The fact of the matter is our economic growth depends on how much we spend and not on how much we improve.

Tsunamis for Economic Gains

According to Jack Hough,“Violent hurricanes are good for the economy. So are cancer, divorce and war. Vegetable gardens are an obstacle to growth, along with stay-at-home parents, plump savings accounts and fuel-efficient cars.”

This is because the measure (GDP) treats all spending as economic gain irrespective of whether you spend on rebuilding costs after natural disasters or on wars. Also, any areas that optimize spending and reduce costs, such as spending less on fuel because of energy efficient cars, directly lower contributions to our economic gain.

Does this actually mean that the more efficient and green we become, the more our economy will suffer? No.

The truth about GDP

As Jack rightly points in his article, the GDP might be used for depicting the growth of a country but it really doesn’t provide the real picture.

1. It treats all spending as economic gain including those which are result of disasters or wars.
2. It pretends all resources are infinite. The numbers considered show a gain from the sale of an asset but no loss from its depletion. Eg. fossil fuels & non-renewable resources.
3. It ignores income distribution. The Indian economy has posted an average growth rate of more than 7% in the decade since 1997 – a remarkable boom. However we still are home to a third of the world’s poor.
4. It treats all spending as paid-for. For eg. the real estate boom is actually a borrowing boom.
5. It does not factor the ‘free work’ like that done by parents. With rapid industrial growth in India, the cost of child and health care has increased and is expected to become a $ 280 billion industry by 2020. Even so, the vast majority of the country suffers from a poor standard of healthcare infrastructure which has not kept up with the growing economy.

What do we really need?

Many economists over a period have outlined these faults and recommended changes. Some of the key recommendations include

1. Measuring income & consumption rather than production
2. Emphasizing on the household perspective
3. Identifying & creating indicators for quality-of-life
4. A well chosen set of physical indicators that give a clear picture of economic & environmental aspects of sustainability.

Economic growth is definitely for the benefit of the country and its people, but a rising GDP is not the right measure for it. Cheap, lasting fixes for a few of India’s challenges – health care, terrorism, energy dependence, inflation – could easily result in something that is already being warned as another possible downturn.

I am sure you agree that to measure a nation's progress we must first define it.