Economic growth: an alternative view: 

Economic growth: an alternative view: 

Context

• India’s current method of GDP calculation treats environmental damage costs as income.

What is GDP?

• GDP stands for Gross Domestic Product. It is the final value of the good and services produced within the territory of the country

Decline in GDP

• India’s decelerating GDP growth rate in the past five quarters has generated panic. A drop in GDP growth rate from 7.4% in January-March 2016 to 5.7% in April-June 2017.
• This decline provide an opportunity to bring economic welfare through improvement in environment quality

Economic development v\s development

• Economists concerned about sustainable development advocate low levels of economic growth since with large expansions in national income come negative environmental consequences such as pollution.
• These adversely affect the environmental quality and economic welfare of individuals and households dependent on the environment for their basic livelihood.

The Indian context

• Studies that have attempted to estimate the economic costs of environmental damages in India have revealed some striking findings.
• Study by the World Bank and the Institute for Health Metrics and Evaluation at the University of Washington found that India’s air pollution alone caused welfare loss equivalent to 7.69% (approximately Rs. 31,316.2 billion) of its GDP in 2013.

Problem of quantification of Ecosystem services

• The environment generates a range of ecosystem services such as provisioning services (food, irrigation, drinking water), regulating services (climate regulation, water quality regulation), cultural services (recreational and religious services) and supporting services (nutrient recycling, soil formation). Identifying and quantifying them for the purpose of damage assessment is a difficult task in the absence of relevant data.
• In India, millions of households and economic activities utilise these ecosystem services for production and consumption.
• Though economically highly valuable, ecosystem services are not traded in the markets and, therefore, their true values are not reflected in the system.
• Therefore, the actual value of economic welfare lost due to loss of ecosystem services will be much higher than what is being currently estimated.

Issue with GDP calculation

• The current method of GDP estimation treats environmental damage costs as income. Since development policies give more priority to income and employment generation, implementation of pollution control policies are very poor.
• At present, the price of a commodity from a polluting unit covers only the private cost of production, not the damage cost. This makes the commodity relatively cheaper leading to more demand and output, and more pollution and environmental damage cost.
• More environmental damage may lead to an increased level of purchase of market goods contributing to expansion of the GDP.

Environmental cost

• An important lesson from empirical studies on environmental damage is that the size of environmental social costs is significantly higher than the social benefits being brought about by GDP growth.

What is  Environmental Kuznets Curve (EKC) hypothesis?

• The Environmental Kuznets Curve (EKC) hypothesis that underlines almost all our development policies, which are directed towards pushing double-digit income growth with little concern for environmental capital.
• The EKC hypothesis is shown in an inverted U-shaped curve depicting the relationship between per capita income and environmental deterioration.
• It suggests that during the initial period of economic development, where per capita income is low, deterioration of environmental quality caused by rapid industrialisation and urbanisation is inevitable.
• Society will have to accept a certain level of environmental damage arising from income-generating activities because large-scale income growth is essential for achieving other development goals such as generation of mass employment and poverty reduction.
• Once per capita income reaches a higher level, the trade-off between income growth and environmental quality will cease to exist.
• With increased financial and technological capabilities, we can restore the environmental quality to desired levels.
• So, income growth on a higher path brings a win-win outcome in the long run where poverty is reduced and environmental quality is improved.

Why EKC is a faulty approach?

• The EKC is a near myth since an increase in per capita income does not bring desirable levels of improvement to the environment.
• The empirical evidence across countries reveals that various attempts to increase per capita income causes more environmental deterioration.
• A large number of poor people are dependent on the environment for their day-to-day activities and therefore more focus on improved environmental quality can push income growth on a sustainable basis.

Conclusion

• Since GDP growth and environmental damage have a strong positive relationship, lower growth in GDP could afford benefits.
• A proper assessment of environmental social benefits and social costs of income growth is warranted so that policies can be directed towards setting environmentally sustainable growth rates.
• Efforts to develop environmental accounting and green GDP for India can help us achieve sustainable development in future.