India’s GDP is back in the news. The third quarter growth rate figure of 3.1% released in the provisional estimates by the government on Friday is being hotly contested. Former Chief Statistician of India, Pronab Sen, has claimed that the latest GDP number is overestimated by 1%. But that’s beside the point. Even if the government’s GDP numbers are true, do they reflect the reality?
Whatever the number may be – 3.1% or 2.1% – does it tell the story of the millions of migrant labourers who have lost their jobs or the thousands of those salaried people who have been laid off or the small traders, shopkeepers, rickshaw pullers, taxi drivers, tailors, barbers, carpenters, electricians, and millions of other self-employed people who have not earned a rupee in the past two months? That’s exactly why many advanced economies are not relying on GDP numbers alone to measure the true state of their economies.
The UK ($2.83 trillion GDP), Australia ($1.38 trillion GDP), and the Netherlands ($902.36 billion GDP) are now publishing periodic reports on economic wellbeing and income inequality, tabulating the distribution of income along with aggregate annual national income and output accounts.
India, the world’s fifth-largest economy ($2.94 trillion GDP), is paradoxically also home to 270 million people living below the poverty line of $1.25 a day, the Reserve Bank of India said in 2018. India must start informing its people not just about the size of the pie but also how the pie is being divided. Policymakers and voters alike should have statistics on who grew and by how much when the country grew.
Professor Paul Samuelson, the winner of the 1970 Nobel Prize for economics, famously joked, “What happens to the GDP when a professor marries his servant?”
The GDP per capita of India’s millions of labourers and its 138 billionaires is the same: Rs 142,719 (at current prices in 2018-’19). The per capita net national income during 2018-’19 was Rs 126,406. But we all know that Rampukar Pandit, the construction worker, who was photographed sobbing by a road in Delhi in May, did not make Rs 126, 406 last year. Nor did the labourers who died on the railway tracks, with some stale rotis and a few hundred rupees as their sole possessions. We also know that this was not what the richest man in India earned in 2019.
The problem becomes even more acute if one has to measure the income of different categories, say by decile or by centile. Or how much the bottom 40% earned in 2019 or over the last 10 years. Or for that matter the middle 50%. Or the bottom 10%. And what economic policies can be devised to increase the income in each category. We are all fixated with one headline number – the GDP.
The absurdity of aggregate numbers
Many governments around the world have realised the absurdity of the aggregate numbers. Public pressure is forcing governments to supplement GDP numbers with the data on income distribution by quintile. The Office of National Statistics, UK, publishes annual Household Income Inequality reports, which measure how evenly household income is shared among the population. The 2019 Report concluded that income inequality in the UK increased slightly over the two years to reach 34.7%.
The UK also publishes Average Household Income Report, with estimates of median and mean disposable income for people in the UK. Median household disposable income in the UK was £29,600 in 2019, growing by 0.4% between 2017 and 2019. In addition, it periodically publishes Economic Well Being Reports, which besides GDP has nine other economic wellbeing indicators. The UK had developed a scientific Economic Well-Being Indicators Framework in 2014 to measure inequality.
The Indian government publishes no such comparable statistics. In fact, the indicators required to measure income inequality have not been developed by the Indian government. Instead, it continues to be fixated with “growing the pie”, $5 trillion and beyond. But how would we know if the government’s economic policies are benefitting the vast majority of people if we don’t even have the statistical measures to tabulate the distribution of growth?
A government responsibility
The efforts of academics like Thomas Piketty and Emmanuel Saez have led to the World Inequality database on the historical evolution of the world distribution of income and wealth, both within countries and between countries. But it’s insufficient and incomplete. Income measurement is a state function and responsibility. Only the government has the vast resources, legal and executive powers and its institutional infrastructure to measure the distribution of income, consumption and wealth and corelate it with its economic policies and objectives.
But the “Streetlight Effect” – a drunk on a dark night searches for his lost keys only under a streetlight because that’s where the light is – is what best describes the approach of the Indian System of National Accounts.
India’s National Indicator Framework Baseline Report, 2015-’16 (the latest) for measuring progress towards Sustainable Development Goals shows India has not developed most of the indicators required to measure and mitigate inequality (or SDG Goal 10).
The Niti Ayog website proclaims: “India played a prominent role in the formulation of the United Nations Sustainable Development Agenda 2030 and much of the country’s National Development Agenda is mirrored in the Sustainable Development Goals (SDGs). The progress of the world to meet the SDGs largely depends on India’s progress.” SDG 1 is to end poverty in all its form everywhere. SDG Goal 10 is to reduce inequality within and among countries.
The National Indicator Framework Baseline Report reveals that India does not have data to measure growth rates of household expenditure per capita among the bottom 40% of the population or the total population. The data on the Gini Coefficient of household expenditure has not been collected. (page 151 of the report). The Gini coefficient is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents.
Similarly, the government of India has no data on the proportion of people living below 50% of median household expenditure. The report further reveals that no national indicator has yet been developed to ensure equal opportunity and reduce inequalities of outcome.
The Australian Bureau of Statistics publishes periodic Income and Housing Surveys, tabulating data on income and wealth distribution. The Australian Parliament in 2014 had set up an inquiry committee to measure the extent of income inequality and the measures that could be implemented to address it. Statistics Netherlands similarly publishes extensive data on income, wealth and wage inequality.
Rising income inequality has provoked fierce political debates in the United States and other Organisation for Economic Cooperation and Development countries.
By contrast, Indian Prime Minister Narendra Modi has not once touched upon the issue of widening income and wealth inequality in the six years of his rule. In his Independence Day Speech in 2019, Modi said, “Let us never see wealth creators with suspicion. Only when wealth is created, wealth will be distributed.”
But the empirical fact is that national wealth has not been evenly distributed and in fact, left to the market, can never be automatically distributed. India’s social development indices are a testament to the unequal income and wealth distribution.
Of India’s children under the age of five, 35.7% years and below are underweight, according to the National Family Health Survey. The Global Nutritional report, 2018, shows that 46.6 million Indian children are stunted, which is 38.4% of all children under five. In India, wasting among children under five rose to 20.18% in 2019 from 16.5% in 2010. North Korea, Pakistan, Niger, Cameroon, Bangladesh and Nepal fared better than India in the Global Hunger report.
In the data released by the Ministry of Health and Family Welfare in 2016, 23% of women ( aged 15-49) had Body Mass Index below normal. It also showed that 50.4% of pregnant women were anaemic. On the other hand, as many as 58.4% of children (between six-59 months) were found anaemic. Only 36.4% of women were receiving maternity benefits.
As of 2018, more than 163 million Indians do not have access to safe drinking water. Over the decade ending 2011, water availability reduced by 15% and it is estimated that India will become water-scarce by 2050. As per the Tendulkar methodology, 22% of Indians live on less than $1.25 a day.
But all these numbers get obliterated in one number: the GDP.
Unhappy with how statistical information like GDP failed to reflect the true state of the economy and the society, Nicholas Sarkozy, when he was president of France set up a commission comprising two Nobel prize winners, Amartya Sen and Joseph Stiglitz 2001, and French economist Jean-Paul Fitoussi, to identify the limits of GDP as an indicator of economic performance and social progress, and recommend more relevant indicators and measurement tools of social progress. The idea was to replace GDP with statistics that truly reflect the fortunes of a country.
A year later, the Sen-Stiglitz-Fitoussi Commission produced a detailed report. They recommended that measures of quality of life, inequality, well-being and the quality of environment need to be included in the traditional indicators like GDP.
Nobel laureate Simon Kuznets, who invented the measure of GDP, had cautioned that it was an insufficient measure as it deceptively hides the stark mismatch in the fortunes of people from different income categories living in the same country. Between 1935 and 1955, Kuznets produced many reports, measuring the impact on the national output of the US by the cataclysmic events like the Great Depression and later the Second World War. The idea of GDP got institutionalised as country after country followed suit. GDP became a global headline number for economies around the world.
Growing the pie
In March 1955, Kuznets wrote a paper “Economic Growth and Inequality”. “Does inequality in the distribution of income increase or decrease in the course of a country’s economic growth?” he asked. “What factors determine the secular level and trends of income inequalities?” Over the next 50 years, more economists like William Nordhaus and James Tobin of Yale University (the winner of the 1981 Nobel Price) investigated the shortcomings of national accounting systems that do not tabulate income inequality.
The 2008 global financial crisis renewed interest in the study of the long-run evolution of income and wealth inequality. Now, the Covid-19 pandemic has brought in sharp focus the extent of income inequality, especially in poor countries like India. The economic philosophy of “growing the pie” followed by successive Indian governments has turned India into a 1% economy. Moving away from GDP numbers and collecting and publishing data on the income, wealth and wages, by decile and centile, will be the first step towards creating a model of equitable growth.
Ashish Khetan is a corporate lawyer and specialises in international economic law. His email address is email@example.com.