GDP row is a fight over the donkey’s shadow

Like in the popular Aesopian fable, the debate on the GDP number distracts from the factors that could truly improve the quality of life in the country

The recent announcement about India’s gross domestic product (GDP) growth in the last quarter has set up a furious debate about whether this is the right figure or has been fudged by moving the base year inappropriately. This reminds me of the Aesop’s fable in which a man hires a donkey and, during a hot journey, sits in the donkey’s shadow. The donkey’s owner objects that the hire was for the donkey, not for its shadow, and so he should be compensated for the shadow. But the traveller argues that renting the donkey necessarily gives him the right to its shade and that it is not such a big shadow anyway. They become so absorbed in arguing over how best to measure the shadow that the donkey walks away. This sounds a lot like the current debate about GDP growth. Both sides of this debate are arguing about a metric that has little relevance to how to measure real progress in the current Indian context.

GDP is a good measure of economic activity but a poor measure of the things that make a country a good place to live.

The origin of the measure of national income goes back to the Great Depression, when the US needed to know how collapsing output and employment were affecting the economy. In 1932, the US Congress commissioned economist Simon Kuznets to estimate national income. His 1934 report became foundational to modern national accounting, and retained its salience during World War II, when it was important to know how much steel, food, machinery, labour, and other resources could be mobilised to support the war effort.

Kuznets himself explicitly warned against treating national income as a measure of welfare. In his original report, he wrote, “The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.” What national income accounting was able to do was measure economic activity, and not produce a single score for how well Americans were living. World War II was followed by the Cold War between the West and the Soviet Union, and it created an enormous demand for comparable measures of national economic power, and GDP became the most successful answer to that demand. In the late 1940s and 50s, the wave of decolonisation around the world, including in India, created a demand for a number that would allow countries to see if they were making progress after independence. National income had evolved into national product measures such as gross national product (GNP) and GDP, and they fit the bill. Countries could now compete not only in industrial output but in rates of economic growth.

It has long been known that GDP is a good measure of economic activity but a poor measure of the things that make a country a good place to live or of its flourishing, in any sense. It does not measure if the country’s environment is being destroyed, whether the air is breathable, if the tap water is drinkable, if the country’s soil and forests are intact, whether public transport works, whether corruption is high, whether the common man can afford a healthy diet, whether women can safely walk on the streets, if the roads are clean or filled with garbage or potholes, if the caste or faith that one is born into affects their job prospects, if people who are different from the norm are accepted, if people have time to spend with their families, whether wealth is distributed equitably, whether teachers show up to teach in government schools, whether the examination system is considered to be trustworthy and fair, whether they trust their neighbours or their government, whether they will be protected in the case of another Covid-19-like pandemic, whether buildings that are certified as safe will collapse without warning, whether they will lead a long life, or whether they have any confidence that their children will have a better life than they did. And ironically, the lower the level of public services whether clean air, reliable water, public transport, electricity supply, or schools, the greater the consumer spending on workarounds to this lack of supply, which then increases GDP. In fact, the best thing the government could do to increase GDP in the short run is to do progressively worse on the supply of public goods. An Atmanirbhar Bharat, where every citizen is forced to watch out for themselves without any public goods, is one where the GDP will be high and the quality of life low.

This is not to say that GDP could not be used to champion real progress — the leveraging of wealth to build social safety nets in Europe, advanced infrastructure in the US and China, and education and health systems in countries even only modestly well-off like Sri Lanka or Costa Rica. And there are many examples where high GDP has made little difference to its people. Take Gabon, the fourth-wealthiest country in Africa, with a per capita GDP nearly five times that of India’s. One-third of the population is poor, unemployment is 36%, and life expectancy, at about 67 years, is among the lowest in the world.

Which brings us to the debate in India. How useful is a 7.8% growth rate, or how problematic is a 2.8% growth rate, if in either case, the country makes little progress on the things that really matter? The obsession with GDP is leading us astray and perhaps it serves certain interests to go in that direction. But it will certainly not necessarily lead to true flourishing or progress. GDP growth is neither a necessary nor a sufficient condition for this to happen.

As Professor Kuznets stated in 1962, goals for more growth should specify more growth of what and for what. And that is simply not clear. Can Viksit Bharat be reduced to a number? Can market-valued economic production be a proxy for progress? Will we continue to fight over the size of the donkey’s shadow while losing track of the donkey?

Ramanan Laxminarayan is president, One Health Trust, and author of the forthcoming book, Bacteria to Buddha: How Cooperation Shaped Consciousness – and Makes Us Human. The views expressed are personal.