Opinion | 'How's life?' No, GDP doesn't answer this question

By mid-race, a startling gap had opened up, with the richest sprinting much ahead. By the time the last group crossed the finish line, the wealthiest were nearly through with the rural banquet. This exemplifies how policies, predominantly guided by income levels, can perpetuate inequality.

The rich can continue to get richer with first claim on resources and rewards, and thus, widen the gap with those that need hand holding — not only to raise their income levels, but also for opportunities such as education and healthcare.

The problem could worsen if policies are guided by metrics that are obsessively focussed on raising a country’s income. Gross Domestic Product (GDP), arrived at by adding up everyone's income in the country, precisely suffers from this flaw.

It is self-evident that income is a key determinant of a person's capacity to buy assets (such as houses), acquire means of comfort (such as cars), spend on children's education, pay for healthcare and utilities such as telephone, power and transport, and to spend on recreational indulgences, such as a vacation or eating out.

To this effect, income has a decisive influence on a person's current state of being. After all, a person's ability to spend on essentials and aspirational goods and services is clearly correlated to his or her earnings.

However, how do you size up a country's economic well-being? Is adding up the income of every individual the most appropriate way to measure the nation's progress?

For long, governments have chased GDP and its expansion speed as the Holy Grail to achieve economic advancement. GDP, by definition, represents the total value of all the final goods and services that are produced within a country's borders within a particular time period, typically a year or a quarter.

Effectively, it is the sum total of everyone’s income or expenditure. For, one person's spending is another person's income. (Savings is income set aside or not spent).

The dominant thinking over the last several decades has been that GDP, and its rise and fall, gives the closest approximation about which way, and at what speed, people's incomes have moved during a particular period.

This explains the near obsessive fixation with levels of GDP and its growth among the government's macroeconomic managers. A vast number of policies are designed with the primary objective of speeding up GDP's expansion.

That said, is GDP alone enough to tell us about 'better life'? Not quite.

For one, GDP is a quantitative metric, and does not say much about the quality of life. It has some design flaws that can make the headline GDP numbers mask major weaknesses in the broader economy.

GDP is woefully insufficient in measuring inequality. For instance, it may well be the case that a large part of the country's overall income may have been driven by only a few people.

India is a case in point. India's GDP (in current prices) in 2017-18 stood at Rs 167.73 lakh crore or at about $2.5 trillion. However, about a fifth of this may have been accounted for by the 100 richest families in the country.

According to the Forbes India Rich List 2018 , the net worth of the 100 richest Indians stood at $492 billion or about Rs 39.2 lakh crore, which was 19.65 percent of India's GDP as on March 31, 2018.

Using income as a measure of better living can be misleading on several counts. It is eminently possible for a rich person to lead an unhealthy life brought about by circumstances beyond his or her control, such as bad environment.

Bad environment can itself be a result of rising income, which may have raised people's affordability to buy cars. Higher income may have been brought on by rapid industrialisation, leading to a polluted environment affecting health.

The Organisation of Economic Cooperation and Development (OECD), a rich nations' club, now brings out the OECD Better Life Index. A result of the global financial crisis that rocked the world in 2008, the index is now in its fourth edition, seeking to measure human well-being using a variety of metrics such as housing, income, jobs, community, education, environment, civic engagement, health, life satisfaction, safety, work-life balance and gender inequalities.

It describes how inequalities touch many different aspects of people's lives, examining well-being gaps by gender, age, education, income, and migration status.

Unlike GDP, the index allows comparison of well-being across countries, based on 11 topics the OECD has identified as essential in the areas of material living conditions and quality of life.

In many countries, migrants face disadvantages such as living in sub-standard conditions compared to their native-born peers. In some others, women continue to face discrimination, both in education and at work and home. These are characteristics that the cold GDP statistics cannot capture.

In February 2008, the then French President Nicholas Sarkozy asked Joseph Stiglitz and Amartya Sen (both Nobel laureates) and French economist Jean Paul Fitoussi to create a commission (The Commission on the Measurement of Economic Performance and Social Progress — CMEPSP) to examine the limitations of GDP as a measure of economic activity and suggest alternate models.

The CMESP report, and the subsequent book titled Mismeasuring Our Lives: Why GDP Doesn’t Add Up by Stiglitz, Sen and Fitoussi, have laid the foundations of moving to a radically new system for measuring economic well-being that integrates seemingly intangible characteristics, including environment and relevant guides, to estimate social progress.

For a country such as India, currently caught in a raging political debate over a controversial GDP calculation formula, it may be pertinent to look at these new systems.

Apart from offering a fresh approach to public policy design, it may well hold the answer to the paradox: Why is India the world's sixth largest economy, and also home to hundreds of millions of extremely poor people?