Net domestic product is a better evaluator: Experts

Last Updated: Sun, Apr 07, 2013 06:12 hrs

The term 'Green GDP' is a misnomer, says a report commissioned by the ministry of statistics and programme implementation.

The report, on 'Green National Accounting in India', says Net Domestic Product is a better evaluator, by deducting from Gross Domestic Product (GDP) the wear and tear not only to machinery but also to human capital (physical and mental disabilities, death), as well as environment degradation.

"Green GDP is an utter misnomer," said the report, issued yesterday. It was prepared by a group of experts, chaired by Partha Dasgupta, professor at the University of Cambridge.

To buttress its point, the report gives the example of a closed economy with a constant population. Suppose, the report said, the economy invests $40 billion in capital, $20 bn in education and also degrades its natural capital by $70 bn in a given year. The traditional accounting system would record $40 bn as investment, $20 bn as consumption and be silent about the loss of $70 bn

The new accounting method, as suggested by the report, would reclassify the $20 bn spent on education as investing in the young, and the $70 bn as disinvestment in natural capital; the total disinvestment is more than the investment ($70 bn against $60 bn). And, the green accounting system would conclude the development was unsustainable that year.

Dasgupta told a press conference on Saturday that such a broader measure of well-being which addressed this problem was necessary. However, collecting the needed data would be hard.

The report said even as GDP routinely gets a bad press these days, it has a tenacious hold on our economic sensibilities.

Though there are compelling reasons to be in the league of top GDP countries, the report said,

"We should note that the race to improve one's position in the GDP league table resembles the proverbial problem of the commons ( a rat race), so all countries lose." Cautioning that it is not recommending GDP be abandoned, the report says ignoring depreciation of reproducible capital and the degradation of natural capital is an indefensible practice in economic evaluation concerning the long run.

It can happen that GDP per capita grows for a while, even as wealth per capita declines. However, it would be impossible for wealth per capita to decline indefinitely while GDP per capita increases ceaselessly. For, in due course, the productive base of the economy, which is what wealth measures, would have little left to further degrade and depreciate.

"A country can be poorer even when the economy is growing, if the productive capacity is declining. If a country decides to increase the GDP at eight per cent (annually) for the next five years, it means they have to increase the rate at which they extract natural resources. But, we cannot increase the GDP (this way) forever," said Dasgupta.

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