Home >Opinion >Towards a greener estimate of India’s growth story

There is a vibrant, and sometimes raucous, debate on environment versus growth in India. Unfortunately, much of this is based on ideology and is not sufficiently grounded in data and evidence. So, we have the environment wallahs arguing to stop a mega-mining project, while the growth wallahs argue equally forcefully that the same project is critical for India’s development. There doesn’t seem to be a robust cost-benefit rubric that can objectively ground this debate in facts.

The question then is whether this situation can be changed, and if we can move towards a more fact-driven national debate. India’s recent move to green its national accounts may well prove to be an important step in this direction.

The government of India appointed an expert group on green national accounting in August 2011 headed by Partha Dasgupta of Cambridge University, an eminent environmental economist. The committee recently submitted its report to Prime Minister Manmohan Singh. The report calls for a new paradigm of national accounting, one that greens India’s national accounts. The report is particularly timely as India has frontally embraced sustainability in its national planning process, with the just-released 12th Five-Year Plan calling for “faster, more inclusive, and sustainable growth" as its tag line.

The Dasgupta report has two important innovations.

First, it calls for including new types of capital in our national accounts. In traditional national accounts, only physical capital (also called manufacturing or reproducible capital) is counted. The report calls for the expansion of the notion of national capital and the inclusion, in addition to physical capital, both human capital, i.e., the population’s skills and well-being; as well as natural capital, i.e., the nation’s ecosystems, land, water and subsoil resources, etc., that are usually not accounted for in national accounts.

Second, the report proposes a new paradigm of economic growth, defining it as growth in wealth per capita, instead of the more popular growth in gross domestic product per capita. It is possible, for example, that in a forest-rich, timber-exporting country, GDP per capita is increasing impressively, while its per capita wealth is falling, because its natural capital (in this case forests) is being razed ruthlessly for exports and thereby fuels its GDP growth. In such a case, it is not clear that this country is growing sustainably and its economic growth numbers should be adjusted to reflect the fact that it is drawing down on its long-term natural (forest) assets (without adequately reinvesting this in its human or physical capital).

The report argues that this new paradigm, where we measure changes in the nation’s per capita wealth, provides a more robust measure of a country’s welfare, compared with the traditional notion of GDP per capita. Wealth per capita captures what economists call intergenerational well-being, i.e., well-being of the citizens of a country across generations, today and in the future, something that GDP per capita does not.

It is hard to disagree with these elegantly argued propositions put forward in the report. What is more challenging, however, is implementing them. For one, the value of national assets (what economists call shadow prices) are extremely hard to estimate. For example, while we have a reliable enough estimate of the quantity of forest cover in India (and we do a fair job of mapping how this changes every two years), it is much harder to attach a value or price to the services offered by this forest cover (such as carbon sequestration, water recharge, soil protection, etc.), which this new approach requires. Implementing this new paradigm of national accounts will be complex. The report acknowledges this and presents a long-term road map for this.

The onus is now on the government, having commissioned this report, to operationalize it. The new type of national accounting that the report recommends is well worth undertaking. Only when we know how much the growth process costs our natural environment will we be able to make objective and sensible choices and trade-offs as a country. Some other emerging economies such as China moved in this direction, but have since slowed as the results are not always flattering when one accounts for the environmental costs of the growth process.

While this greening national accounts exercise will help address the versus environment debate at a macro level, there is also a need for an improved cost-benefit rubric at a micro level, i.e., at the level of specific projects. Right now, the process of undertaking a cost-benefit exercise for a new development project is somewhat opaque and often does not adequately account for environmental and social externalities. This is sub-optimal. Perhaps the government could consider appointing an expert group to help design a suitable cost-benefit framework for new projects that explicitly accounts for environmental and social externalities.

The Dasgupta report is a sensible, small step towards a more robust, transparent and informed debate on the economic growth issue. It is now for us to convert this small step into a giant leap.

Varad Pande is officer on special duty to the Union rural development minister.

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