Macroeconomics and the common man
I begin with paying my respects to R.K.Laxman who the nation lost last month. For nearly 50 years his cartoons were the most jargon-free commentaries on the development of the Indian economy.
Eleven years ago he graciously helped me select eight of his cartoons to include in my book, Remaking India: One Country, One Destiny. The pictures said much better what I was trying to say in words. One cartoon shows a poor man reading a newspaper and proclaiming, “Terrific progress! In growth rate, in industry, in exports, and in exchange reserves—what a change from the miserable situation we were in!” Another shows two beggars outside the stock exchange watching many happy brokers come out. Says one beggar, “Look, we are really fortunate—the Sensex must have gone up still further!” A third shows an angry politician berating villagers surrounding him, “All the time you ask for drinking water. Don’t you ever want to progress? I’m telling you I am giving you telephones.” Higher growth rates, rising stock markets, million more cellphones. Laxman’s point was, the government cannot convince the common man that he is really better off with such macroeconomic indicators of progress.
Another cartoon shows a villager telling a government leader who has landed in a helicopter near his hut, “No, sir, this is neither a flood-hit nor a drought-hit area. We are only hit by bad government.” And another shows a government minister angrily telling a bureaucrat, “The problem of his village is still not solved? But we held debates and seminars on the problem. We must hold more seminars and discussions.”
Gross domestic product (GDP) growth is good, no doubt, but how well has India been converting GDP growth to wellbeing of the common man?
Two sets of critical numbers affirm what Laxman had been saying with pictures.
One set of numbers, the Sustainable Economic Development Assessment framework developed by the Boston Consulting Group, measures how well countries convert GDP growth into wellbeing of their citizens. It measures performance along 10 dimensions, such as employment, education, health, income inequality and impact on the environment. For every unit of GDP growth, India produces less wellbeing for its citizens than its peers—the three other BRICs (Brazil, Russia, India and China) countries, five countries in Southeast Asia, and our four neighbours—Pakistan, Bangladesh, Sri Lanka, and Nepal. The two dimensions along which India fares worst are generation of employment and protection of its environment. These are the most critical measures of the sustainability of India’s growth. India, with its enormous population and economic progress is becoming the most environmentally stressed large economy in the world. We are blessed with a large population of youth: but they must become employed to contribute to the economy and avoid social-political breakdown.
Macroeconomic accounts do not pay much heed to “stocks”—what is on the balance sheet. GDP, the pinnacle of macroeconomic measures, is a measure of “flows”. It is the equivalent of the revenue accounts of a company. GDP measures the total volume of economic activity in a country (and does not even distinguish between good activity and bad activity). Good corporate managers know that while increasing flows by pursuing growth of sales numbers, they should keep an eye on the balance-sheet—the stock of capital. Indeed the collapse of many dot-com companies during the boom in the late 1990s was due to the failure to observe this simple principle.
Excessive attention to the measurement of GDP, an aggregate measure of flow, has vicious effects. Damage to the environment reduces the stock of natural capital while it may increase economic activity. Nations have social capital too. Two large components of this are the social cohesion of the nation and citizens’ trust in institutions of governance. With his cartoons about what less well-off citizens feel about the rising fortunes of some and about the government, Laxman warned that our social capital was eroding. Sectarian conflicts will erode it further.
The other critical set of numbers measures the productivity and efficiency of an economy. How much input does an economy need to produce a desired output? India’s incremental capital output ratio has reduced by as much as 50% in the last five years according to some estimates. In other words, if it took one rupee to produce an additional unit of outcomes five years ago, it takes one and a half rupees now. This reduction of productivity is caused by increasingly clogged and leaking pipes in the country’s project management and programme delivery systems. Investments in projects are stuck by contentions amongst stakeholders and confusion amongst agencies. Investments in social sector programmes such as education and health—areas in which India is doing very poorly compared to its peers—do not produce required outcomes.
India has a management problem resulting in economic problems. As Laxman’s common man said, “We are hit by bad government.” Moreover, as Laxman observed, more seminars and discussions will not fix this problem. We need better administration and better management on the ground.
In a few weeks the government will present the annual Economic Survey. India must grow its GDP. But India must also ensure GDP growth translates into wellbeing of the common man much faster than it has so far. Therefore the government’s priorities must be actions to: (1) unclog and repair leaking pipes and fix the apparatus of the state and (2) develop a better scorecard to report progress to citizens in numbers they can relate to their wellbeing.
Arun Maira is a former member of the Planning Commission.
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