Most people have an innate sense of a balance sheet—of their
assets and liabilities. A tribal woman who pawns her silver jewellery to a
money lender knows she has parted with an asset in exchange for money. She may
not know the term or understand accounting but she knows she can only redeem
her asset by paying the loan with interest. She also knows that if she consumes
this money she would enjoy a higher spending level while it lasts but also that
she will in the end be poorer because she has consumed an asset. But if she,
say, buys a sewing machine and earns enough to pay back, she will have improved
her assets and her income-generating capacity. Micro-finance banks specialise
in such schemes.
Now a nation’s population may have a mental picture of its individual wealth but has no estimate of the national assets. It is a government’s duty to collate and publish this figure. Most countries are bound by the measurement of gross domestic product (GDP), an income account, so they have not so far valued tangible assets. As a result while they may be improving incomes in the short run by exploiting natural resources, they are in fact getting poorer if earning is not invested to give an adequate return to offset the loss of the earth’s bounty. A balance sheet of rich oil producers like Saudi Arabia, Nigeria or Venezuela will show that depletion of oil reserves will cause incomes to dry up in a measurable span of time.
Governments and legislatures can enact polices that show the value of resources. The questions that will then arise are (a) whether some assets are irreplaceable and thus beyond money figures (the Western Ghats eco-system for example); and (b) whether the asset to be created from the sum realised from the tree wealth will yield a return much beyond the yield the flora give by adding to their bio-mass each year. These are simple examples relating to tangible assets. There are many more complex ones relating to intangible one. Ticklish questions arise.
In farming communities, for example, in recent years there have been a spate of suicides. Is the loss of men in their productive age to be deducted from the asset of manpower? Which leads to bizarre query whether the expenses on their funerals, which lie in the services sector, are to be added to GDP or capitalised as a cost added to the value of the dead human being. There is, whether we like it or not, an accounting for everything. Ignoring it doesn’t take away or add anything.
It is for this reason that the initiative taken by former prime minister Dr. Manmohan Singh in measuring “green accounting” in terms of the loss and replacement of human and natural assets will in the next few years be seen as a nation-building policy. What the Modi government’s view is will become clearer over time.
he Economic Survey that precedes the Union Budget every year is often hopeful reading. The government uses the right phrases to lend cheer even to a bad situation by giving a glimpse of the modernisation that is to materialise in the coming year(s). Prime Minister Narendra Modi has already assured us that “achhe din aane wale hain.” However, more often than not, when the budget is actually presented to the Lok Sabha one is at a loss to find allocations that support the often lofty aims articulated in the survey.
Like so many previous budgets of the United Progressive Alliance (UPA), this year, too, 80 per cent of funds are committed to fixed expenditure, leaving the finance minister with little leeway to paint a new picture of new horizons.
Commenting on the first budget proposed by Modi’s National Democratic Alliance government on July 10, Congress leader Sonia Gandhi was quoted in The Hindu as saying “It is a copy of UPA’s policies. It has merely copied our policies and schemes.”
She may well have added that she hoped the following passage in the Survey would be sincerely taken note of: “While 2015 will be a landmark year for sustainable development (italics added) and climate change policy, 2014 is the last chance for all stakeholders to introspect to be able to wisely choose the world they want post 2015.”
(Sustainable development has been a buzzword in international fora since the Rio Earth Summit in 1992 and it is to Manmohan Singh’s credit that in 2011 he took the first step towards creating the accounting format to address the issue.)
The passage makes one feel we are either on the brink of an abyss or on the brink of something momentous, something that will give the country a handle on its complex and myriad problems. Yet there is no mention anywhere of the NDA’s understanding of the mathematics of sustainable development. The “last chance” presumably refers to policies to replace the Millennium Development Goals (MDG) all countries agreed to at the United Nations summit in 2000, to be reviewed and updated in 2015. What is required is a new way of looking at progress that is not only economic but also has the kind of social value this country is looking for.
Does the government have the commitment to create an accounting format that would provide for the required measurement of wellbeing? Will it go beyond parameters generated by the System of National Accounts (SNA) that leans primarily on GDP—about which there is growing general scepticism?
ven when the system was first presented to the US Congress in 1934, its creator, Professor Simon Kuznets, disapproved of its use as a general indication of welfare. “The welfare of a nation can scarcely be inferred from a measure of national income,” he wrote. Despite his misgivings, the measure was adopted as the international standard at the Bretton Woods Conference in 1944 and thereafter by the UN and its agencies.
The convenience of SNA was, and is, that it gives finance ministers a single figure on which they can fix levels of taxation and set goals for economic growth. It’s also a league table that allows countries to pull rank by showing off both the quantum of product and growth rate; of course some countries do not have much to show off about, especially when it comes to per capita figures. India is among the latter. Although it stands 10th, between Italy and Canada among 180 countries, it ranks 128, between Cote d’Ivore and Yemen in the per capita table. Even Zambia has a higher ranking. (The World Bank, 2013.)
Now there is a worldwide effort to replace SNA with something that will give a glimpse of other faces of welfare. In the autumn of 2009 in their report to the French president (Nicholas Sarkozy) titled “On the Measurement of Economic Performance and Social Progress”, Professors Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi wrote:
“What we measure affects what we do; and if our measurements are flawed, decisions may be distorted. Choices between promoting GDP and protecting the environment may be false choices once environmental degradation is appropriately included in our measurement of economic performance. So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.”
But public perceptions are often at variance with official statistics. If the government tells the people of Delhi that its economic progress is greater than all other cities in the country, a vast majority of them, suffering from respiratory illnesses owing to increasing pollution, will inflate their personal discomfort and discount the figures of growing prosperity. Or they may say it’s all an illusion and collusion between the government and the medical business as the money is flowing to doctors and chemists.
The Stiglitz report finds that: “The standard measures may suggest, for instance, that there is less inflation or more growth than individuals perceive to be the case, and the gap is so large and so universal that it cannot be explained by reference to money illusion or to human psychology … In France and the United Kingdom, only one third of citizens trust official figures, and these countries are not exceptions.”
These are countries that have been 100 per cent literate for a century. What then of India, where 60 per cent of the people are only mentally numerate, and that too only up to perhaps 20? Even ministers of the Union Government have expressed doubts about our national accounting figures. Former environment minister Jairam Ramesh said although government statisticians recorded GDP growth of nine per cent, it was nearer six per cent if environmental factors were considered. (As we will note below Ramesh stands vindicated.)
A simple metric illustrates the situation. It’s now accepted that the ecological footprint of a society is the amount of land needed to provide the ecological services corresponding to the consumption needs per capita and as a whole of that society. The average footprint per person is estimated at close to 10 hectares in the US and one hectare in developing countries. For all persons on earth to reach US levels of consumption would require an area equal to five Earths.
A mere doubling of consumption, i.e., from malnutrition to a bare balanced diet, would exert unbearable pressure on natural resources, yet the prime minister keeps talking of developing the manufacturing sector. But there are historical examples of resource-scarce countries like Japan becoming rich through industrialisation merely by developing better technology and improving quality of products.
But the strategy for such progress is human development rather than abundant natural resources (which Japan imported by stripping down the forests of Borneo, Western Australia and mines all over the globe).
or some time now, national accounts have been getting more complex as they cover new domains and phenomena. For example, they have been extended to take in “green accounting”, i.e. the exploitation of natural capital, SEEAC (system of environmental and economic accounts), and HDI (the UN’s Human Development Index) or the state of human capital.
If all goes well, they are now poised to measure even the wealth of nations. Economies could be viewed like balance sheets, stating income and expenditure, profit or loss, assets and liabilities. The change in assets would show gain or loss of wealth. This is something that needs encouragement, no matter how difficult the first estimates of value and definition of assets. However, there is no mention in the financial papers of 2014, survey or budget, of any steps that India might take accelerate the implementation of such an asset based system by 2015.
What’s the likelihood of the Modi government taking the “last chance” to choose the correct path for the country we wish to live in say for the next 25 years, the period on which perspective plans are based? And what’s the probability of developing the metrics and participating in the international movements—we must take note of the November agreement between China and the USA on carbon emissions—to monitor the health of the earth and its natural attributes and the wealth of its denizens?
New models have absorbed all of the extensions and add-ons to SNA and hold “economic growth” to be the growth of wealth per capita not per capita growth of GDP and “inclusive economic growth to mean the inclusive growth of wealth”. A distinction is therefore made between wealth and income.
Therefore, “green GDP”, being a flow, “is an utter misnomer”. Wealth needs valuation and measuring the annual change in wealth leads to a totally new vision than seeing whether people have more rupees in their pockets. There is no doubt serious reform is required so that the public and government have the same perception of progress. On a smaller scale, the RBI, for example, made its pronouncements more intelligible when it started basing inflation on the consumer rather than the wholesale price index on April 1, 2014; the middle-class housewife is concerned with the prices at her vendor’s counter not the wholesale merchant’s in the mandi.
hile many agree that Winston Churchill’s description of Clement Atlee as “a modest man who has much to be modest about” would be apt for the Sphinx-like Manmohan Singh as well, there is one achievement on which his inscrutable silence is unfathomable. To him goes the credit of having commissioned the report on the “Green National Accounts in India”. The framework was written between August 2011 and March 2013 by an expert group under Professor Partha Dasgupta of Cambridge University. The fine hand of thoughtful drafting is evident everywhere in the Dasgupta Report (henceforth the Report), as are the careful arguments that lead it to state that:
“The coin with which economic evaluation should be conducted is wealth per capita, [from] which we obtain an operational notion of ‘sustainable development’. Development would be sustained over a period of time if and only if the aggregate net investment per capita was positive. We should stress that by ‘aggregate net investment per capita’ we don’t mean aggregate net investment … divided by population size, we mean instead the social value (emphasis added) of the per capita stock of assets.”
Releasing the Report, Manmohan Singh acknowledged the need for a broader measure. “Often economic policies designed to promote growth have been implemented without considering their full environmental consequences, presumably on the assumption that these consequences would either take care of themselves or could be dealt with separately,” he had said, adding that there was evidence to suggest that such policies might actually result in net decrease in well-being.
He added: “I believe India can and should take a leadership role in clarifying the concept of sustainable development,” noting that ‘this (the 12th) five-year plan is the first to make mainstream sustainability its primary goal.’”
In “Where is the Wealth of Nations” (WWN, 2005) the World Bank had stated the same proposition as follows:
“However sustainable development is defined, achieving it is, at heart, the process of maintaining wealth for future generations. Wealth is conceived broadly to include not only the traditional measures of capital, such as produced and human capital, but also natural assets. Natural capital comprises assets such as land, forests, and subsoil resources. All three types of capital—produced, human, and natural—are key inputs to sustaining economic growth.
“The standard national accounts measure the change in a country’s wealth by focusing solely on produced assets. A country’s provision for the future is measured by its gross national saving, which represents the total amount of produced output that is not consumed. Gross national saving, however, can say little about sustainable development, since assets depreciate over time. Net national saving equals gross national saving minus depreciation of fixed capital and is one step closer to measuring sustainability. The next step in measuring sustainability is to adjust net saving for the accumulation of other assets—human capital, the environment, and natural resources—that underpin development.
“This chapter introduces the concept of genuine saving (formally known as adjusted net saving) … It then presents and discusses the empirical calculations of genuine saving rates available for over 140 countries…. Genuine saving provides a much broader indicator of sustainability by valuing changes (emphasis added) in natural resources, environmental quality, and human capital, in addition to the traditional measure of changes in produced assets provided by net saving.”
Both reports emphasise genuine or aggregate net investment as crucial to measuring wealth. It’s something the common man would readily appreciate. He would know whether his assets—a new motorcycle, for example—have increased or—like the loss of water from his tubewell or municipality—have decreased or remained static.
The improvements of the commons, the macro- and micro-living conditions, would definitely be noticed by a population increasingly oppressed by their deterioration—especially in India where assets per capita are few and far between.
If the BJP-led NDA has accepted the need for continuity in
those areas where the UPA initiated nation-building policies, the government
should have made a statement supporting the Report. Since Modi perorated
at length on the environment during the election campaign (and subsequently in
his first speech to the nation as Prime Minister from Red Fort on Independence
Day), specific mention about aggregate net investment, based on new criteria,
should have been made in the in the pre-Budget Economic Survey of 2015. This
would have given an indication of commitment to the “last chance” for
But it cannot be said that the NDA has elaborated on the
kind of statistical matrix it would use to prepare beyond 2015, though the
prime minister uses every opportunity to emphasise the need for a Swachh
Bharat by 2019, Mahatma Gandhi’s 150th birth
or a new system to emerge, the Ministry of Statistics and Programme Implementation would have to emerge from the cocoon of the SNA and develop techniques to measure not only the flow of monetary transactions but also give a social value, known as a shadow price, to every capital asset—even if some are intangible.
That measure should take into account not only monetary wealth but also the sum of arts and aesthetics that adds to the joy of life. How do we measure the continuance of, say, Balamuralikrishna on the music scene or the loss of Kumar Gandharva? Quality of life perceptions are an important measure of assets. This requires both subjective and objective data. Bhutan’s progress is stated in terms of happiness not money.
Substantial work has been done on opinion polls and other yardsticks of intangible value. Golden ages, like the European Renaissance, are remembered not primarily for the treasure created though expanding output and trade but more for the works of art of da Vinci, Raphael, Michelangelo; and for the architecture of Palladio or the gardens laid by painter-architect-archaeologist Pirro Ligorio and Alberto Galvani, court architect-engineer at the Tivoli Villa d’Este near Rome in the 16th century and the 15th-16th century; or the Baroque compositions of the Corelli-Locatelli-Vivaldi period right up to, say, Bach’s Goldberg Variations.
That is also how the Gupta age with the advance of Sanskrit and the various shastras, music and dance, sculpture and territorial expansion is remembered as “golden”. Hopefully India, with its rich heritage of culture, is on the verge of an awakening that will also undo, to give one example, the ugly municipal art with its universally distorted cement-plaster effigies of our national heroes, the show destroyed by shoddy craftsmanship. One wonders how often an aesthete like Indira Gandhi winced when she saw her effigies in moffusil towns.
Like the World Bank in its WWN, the Report recommends the collation of data on wealth which consists of:
(i) manufactured capital such as roads, canals, factories, housing, etc. (popularly referred to as infrastructure);
(ii) intangible human capital that depends on the quality of the population (as defined by HDI) rather than just populousness; and
(iii) natural capital such as the ecosystem, the waters of the seas and rivers, the forests and the wildlife in them, mines and other sub-soil resources etc., concern for which is expressed in economic accounts in the SEEAC format developed by the UN in the wake of the Rio Earth Summit of 1992.
In WWN, the World Bank says, “The first key message is that natural capital is an important share of total wealth, greater than the share of produced capital.” Therefore it is obvious that for any country, especially one with such a heavy pressure of population on land as India, careful monitoring of natural capital is vital. A beginning has been made as the Report gives the physical estimates (year 2000-2009) of the opening and closing stock of timber in forests, of agricultural and pastoral lands, etc., as well as methods for their improvement and future development.
These could be used in the 2015 accounts to measure the impact of government decisions in the field of natural resource and environmental management. These include dilution of the powers of the National Green Tribunal, altering the composition of the National Wildlife Board, relaxation of forest clearance norms, suspension of clearance for prospecting mines, etc. A well considered National Wealth Accounting system would show up the sustainability of these measures.
Secondly the WWN finds that: “The wealth estimates suggest that the preponderant form of wealth worldwide is intangible capital—human capital and the quality of formal and informal institutions (emphasis added) … rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.”
With the admitted failure (verging on collapse) of our education system and the battered state of our parliament, judiciary—65,000 cases pending in the Supreme Court and crores in lower courts, where the release of under-trials has been ordered if they have been in jail for half the period of what would have been the sentence if convicted!—and administration, it would be foolhardy to believe that they have the capacity to yield a positive net present value on the investment being made in them, thus failing the second “if and only if” requirement for inclusive growth given in the Report.
Without concrete figures, the information on which policies are based tells less than half the story. That the world and India are both laggards in this aspect is apparent from the fact that as early as 1987 the Brundtland Commission report, which kick-started the questioning of SNA, stated that sustainable development meets “the needs of the present without compromising the ability of future generations to meet their own needs.”
Some insight can be provided by the World Bank, which took snapshots (published in 2013) of India’s natural capital in 1995, 2000 and 2005. Over this period, per capita natural capital declined to $2,700 from $3,400 (at 2005 prices). At the level of our tribal woman mentioned above this is equal to the loss of 20 per cent of her silver. This is a worrying trend from a resource conservation point of view, but the consolation is that comprehensive wealth—the sum of natural, physical and human capital—grew in this period because of gains in human capital.
However, there is likely to be vast disagreement on the point of increase in comprehensive wealth between the Bank and our villagers, who are emigrating by the million to the slums of towns and cities in search of a livelihood. On the decline (even plunder) of natural capital, though, there would be complete agreement.
But such perceptions should not lead to parsimony as the opposite, i.e. a conservation of wealth and a decline in income is possible as well. For example, Odisha chief minister Naveen Patnaik, standing on top of his trillions-of-rupees deposits of minerals may be among the world’s wealthiest men. Paradoxically, he is so poor that he can’t ensure a diet of 1,500 calories per day for all his voters. Therefore wisdom lies not in hoarding but in maximising the exploitation of resources to arrive at that desirable rate that keeps in mind such sustained growth as will ensure the continued well-being of future generations. The Report lays out one unambiguous criterion for investment:
“The criterion that ought ideally to be used to evaluate, say, an investment project is the Present Discounted Value (PDV) of the flow of social profits arising from it. What is not commonly known is that the PDV in question is the change in wealth brought about by the project. That means the PDV of the flow of social profits arising from an investment project is positive if and only if the project gives rise to an increase in wealth.”
This is the second “if and only if” postulate of the Report, referred to above.
The question before the Modi government is whether its policies to revive the economy should restore growth to a sustainable level at eight per cent per annum or whether it should be like a flash in the pan just before the next election with every party for itself. What the last election has shown is that populist but ill-administered giveaways like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), the Right to Education, subsidised food, etc., guarantee no electoral dividend. Our leaders, irrespective of partisan considerations, have to remember they are dealing with a country with an increasing population that knows of and feels the shrinking resource base per capita.
As in a family or company, responsible governance would keep steadfastly to the path that ensures net saving and investment is greater than gross consumption, even if that means choosing a path that does not maximise the rate of growth or wealth per capita over the short run, i.e., the tenure of a government. It should ideally identify a desirable rate that justifies inter-generational equity. Here the ecological footprint is of great relevance.
It is perhaps in this choice that a comparison of the intellectual powers of the two governments will be the sharpest.
An individual or company with a net surplus has the option of speculating (the odds on payout in roulette are 35:1) or investing in some asset that will balance safety with a more moderate future income or savings. Countries can gamble on investments in “populist” schemes (that are genuinely popular) that consume savings without producing social profit or in those that have a positive inter-generational social return.
In the present scenario, the eroding power of inflation makes it difficult to find investments that give positive real returns. Individuals and companies and the government would try hard to keep ahead. According to The Economist (August 2), “Reliance’s return on equity is mediocre—at 11 per cent after tax, it is below the company’s cost of capital”.
But the election has shown that despite showering a bounty of so-called poverty alleviation schemes, the UPA was rejected by the electorate. Issues of implementation and corruption proved that good governance (human capital and the quality of formal and informal institutions) was obviously more important. From 2014 our growth in wealth will measure the achche din.
Discounted cash flows are regularly used in business and individuals have an intuitive feel for it. People know that receiving `10,000 now is worth more than the same amount five years from now. However, if an investment of `10,000 gave a return of `18,000 in five years, and they could only invest the money at nine per cent in the bank, they would go for the latter as its PV would be positive. People opted for promises of Modi’s returns deliverable over the next five years rather than the UPA’s goodies deliverable yesterday.
ater in this essay we will look to see whether some of the projects carried forward by the NDA from the UPA’s shelf, and to which Sonia Gandhi so smugly referred on July 10, meet the two criteria for sustainable growth set out by the Report i.e., genuine savings or net aggregate investments that ensure inter-generational wealth.
(It is worth reiterating that genuine savings are a much broader, better indicator of sustainability as they value changes in natural resources, environmental quality, human capital, in addition to traditional measures of changes in produced assets provided by saving.)
If they fail these criteria it means NDA has not applied its mind and that we can expect more of the same populism that does not take either or both aspects into account and is little concerned with wealth-creation. Naveen Patnaik’s GDP may grow if the ores he is the owner of are exploited. So will that of other states that increase the rate of exploitation of natural capital.
But “the race” to improve one’s position in the intra-state GDP league table resembles “the proverbial problem of the commons” (in the present example, a “rat race” in which all states will lose if the exploitation of irreplaceable natural assets is not offset by an investment with a positive return over an inter-generational time period). This will fail the test of the first criterion.
As we will see from the World Bank’s study of Bolivia, it is entirely possible that GDP per capita increases even as wealth per capita declines. What would be impossible is for wealth per capita to decline indefinitely while GDP per capita increases ceaselessly. The tribal people of Chhattisgarh and adjoining states rightly fear that if their forests and minerals are given away to fatten the pockets of those who exploit them without ensuring an adequate investment with a positive NPV for intergenerational sustainability, the productive base of their existence will be decimated to zero value.
While discussing the case of the genuine saving rates of 140 countries, the World Bank’s “Where is the Wealth of Nations” takes the example of Bolivia. Though small in size and population compared with India, there are similarities. Both have low GDP, Bolivia around $1,000 per capita, compared to around $1,500 for India. But Bolivia would compare well with states such as Odisha.
Rich in natural resources, both enjoy rents from subsoil minerals. Bolivia’s gross national saving is 12 per cent of gross national income (GNI). However, as in any business, deductions have to be made: up to nine per cent for depreciation, leaving a net saving rate of only three per cent.
However, as per HDI norms, expenditure on education at five per cent of GNI is considered an investment and added back, bringing up the saving rate to eight per cent. But the picture changes rapidly as a deduction of nine per cent is made for depletion of minerals and the savings rate turns negative. Even though net forest depletion is zero, damage from pollution is deducted and the genuine saving rate is placed at minus 3.8 per cent of GNI. Clearly this violates the criteria for sustainability. Bolivia has to seek another consumption path. This is substantially true of Odisha as well.
Is there any other way, at their very low per capita income level, but to care little about the future when life at present is so precarious? Does the suggestion of belt tightening—a standard IMF recommendation to strained economies—sound like an absurdity? The option is to import savings from elsewhere (as the US does from China for example), that is, provided these can be serviced. (Argentina very recently declared bankruptcy.)
The only way to do this is to select projects that have a socially positive PDV. The path chosen must compensate for the depletion of natural resources and the method of producing reproducible goods has to be at a margin where depreciation is a much lower proportion than nine per cent of GNI or the margin of surplus much higher. Most traditional manufactures probably have very marginally positive returns. (In India handicrafts have to be subsidised.)
It is only the latest inventions in electronic gadgetry, software, computer games, medical technology and other such products of research and technology, mostly developed in the US, that fetch the kind of returns required. It is highly improbable that Bolivia or Odisha would attract such activity. It is in the manufacture of these items that China attracts the largest share of foreign investment worldwide owing to the skills of its population.
The picture is not restricted to landlocked countries like Bolivia. Most rich oil producing Middle Eastern and African countries have had negative savings rates, Nigeria and Angola being minus 30 per cent. East Asian and SAARC countries have strongly positive gross saving rates: China’s is over 30 per cent and in South Asia, Nepal led with 30 per cent while India saved 26 per cent. Quite a few Indian states would have negative net savings rates, the migration to urban centres being a sure indicator of the state of the villages. It would be worth a study.
The interesting part is that there isn’t a strong correlation between high savings and high growth as a percentage of savings. Clearly some business models are yielding higher returns, financial and social, than others. (The best is that of tiny Monaco which has a purely service economy famous for Monte Carlo’s casinos. It has the highest per-capita GDP in the world of $163,026. The US (13th position) has less than a third at $ 52,800. Bolivia’s or Odisha’s chances of becoming a gaming hot spot are, alas, nil, at least for the foreseeable future.
What if we were to carry out a similar assessment for India? Do we have the data or the organisation to arrive at a set for figures of our wealth? Happily, the answer is that our statistical infrastructure could quickly produce a reasonable estimate of assets which it could keep refining.
Such improvements as are feasible today would be partial but would never the less be an advance. Some estimates have already been given at the 21st Conference of Central and State Statistical Organisations (COCSSO) in January 2014, which ended on a positive note.
The other caution is that the value of natural assets as a local resource is different from their valuation on, say, a national or international plane. The value of an oasis in the Thar Desert cannot be equated with the price of water in Delhi. It cannot be assessed as so many paise per litre. While the latter is inadequately supplied, there is a life sustaining flow. The crisis of life arises in fact from the quality of water, which is a governance problem. In the desert, the obliteration of an oasis would lead to the evacuation of those it sustains. The threat from one thoughtless stroke of the political/bureaucratic pen is huge, compared to Delhi’s inhabitants.
Similarly the value of a river front to a community that lives on its banks and derives food and sustenance from it is quite different from the value attached to the water by, say, a hydro-electric project or an irrigation scheme. Here, too, the Supreme Court has had to intervene to prevent the Ganga-Yamuna basin from gradually drying up owing to the cupidity of business-political nexus in the name of development by insisting on an “environmental flow”.
The oasis may be completely dispensable to a road builder looking for the most convenient alignment, but caravans and camels thirst for it. All the “reclamation” of jheels, village ponds and other aquatic systems has caused immense and often irreparable harm to the habitation and land but this has, in the larger context, been treated, at least till Sonia Gandhi’s NAC came to play a role, with a casualness bordering on depravity.
This is also true of other features, like groves, that are invaluable in the local context. Would anyone care to value, for example, the Taj Mahal, the Tirupati and Thanjavur temples, the black leopards of the Western Ghats, the bustards of Gujarat, the Himalayan snows, etc.?
In other words the social and local value of assets is often irreconcilably different from the assessment of a ministry in a distant capital. Pike fishermen in Norfolk, England, have long defended the Wensum River to preserve their sport and recreation even though the larger community has different views on its waters! However, they have been able to arrive at an understanding and a scheme acceptable to all.
s far as the country is concerned it had a positive savings rate of 20.8 per cent in the period 2009-13 net of consumption of fixed capital. What is the position of genuine savings? According to The Hindu (August 1, 2014) a confidential report to the UPA government by the National Institute of Public Finance and Policy estimated that 75 per cent of GDP came from the black economy, led by higher education, real estate deals and mining. India’s black economy could now be nearly three-quarters of reported GDP. The share of minerals is 10.32 per cent.
In these days of personal account numbers and computerised tracking of transactions, this finding looks like a motivated job. But there is no estimate of how much mineral is mined illegally, how much forest cut, how much fish is caught (it has obviously proved ruinous to fishermen in the Arabian Sea and the Bay of Bengal and to river fisheries), and so on.
A poor estimation of this would stymie the resource planning of the Modi government. It would, therefore, have to be cautious in its approach to touching natural resources before they are reliably quantified. The estimate in WWN is that we consume 3.6 per cent of GNI of natural resources leaving a surplus of 17.2 per cent.
To this figure we need to add the cost to be deducted from GDP under the SEEAC system of the effects of pollution. Estimates of environmental damage made for 2009 in the World Bank’s 2013 report, “India Diagnostic Assessment of Select Environmental Challenges”, make for depressing reading. The mid-point estimate of losses owing to this damage is 5.7 per cent of GDP or `3.75 trillion ($80 billion). That the maximum damage is caused by air pollution, both outdoor (1.7 per cent) and indoor (from cooking hearths, etc, at 1.3 per cent) is hardly surprising. The monetary value is set at `2 trillion. Delhi now has the infamy of replacing Beijing as the world’s most polluted city. Everyone from the president in his palace to the migrant worker in his jhuggi is affected.
If we add the 0.8 per cent damage from sanitation (`0.5 trillion) it becomes easy to visualise the enormous benefit that could accrue to GDP from providing toilets and clean running water. With these deductions the genuine savings rate comes down to around 12.5 per cent. Can we achieve a growth rate of eight per cent + at this level of investment, which is around 4.5 per cent of GDP? (Thus Jairam Ramesh was justified in writing down GDP, even though he may have been thought to be too clever by half.)
Some method of improving productivity is required. So far it’s been the belief in Delhi that open defecation is part of the romantic setting of our rural picture but this romance hides the sickness and the loss of life that is a part of the scene. That the UPA didn’t hasten the allocation of funds to end this hazard is a serious lapse on its part.
But change is on the way: the NDA is headed in the right direction. The prime minister, who frequently reminds us that his childhood years were spent at a tea stall on a railway platform, linked growth in tourism to cleanliness. One can be sure that kilometres of plastic and shit that precedes and follows railway stations is not what the tourist comes to see.
To address this scourge, Arun Jaitley allocated `3,43,770 million rupees (US$7.2 billion) of the general budget to ensure toilets in every house. The allocation, 425 per cent higher than the Congress-led government provided last year, will be spent under the Clean India campaign, officially Swachh Bharat Abhiyan. Modi has promised that each village and town will be clean by the end of Mahatma Gandhi’s 150th birth anniversary in 2019.
The mathematics of this is fascinating: suppose total investment over the course of the project is five times this year’s, i.e., `1,718 billion. Taking a proportionate 20 per cent return per year, the project would recover `1,500 billion by 2019. The shortfall of `218 billion would be made up in the next five months. Besides improving the health of, for example, 80 crore people after five-and-a-half years, the return should be `500 billion a year (more owing to population increase) or about 29 per cent. This would beat Reliance’s current and projected performance!
This is a simple back-of-the-envelope calculation; the actual algorithm would be a little more complex, but not much more. The investment would be a winner according to the NPV measure set by the Report. Of course it needs to be said that while expenditure on toilets may add to GDP should they be listed as assets if and only if they work? In India, there is this antediluvian satisfaction with jugad—we now have to shift to products of quality for them to be accepted either as income or assets. Given a family of five and taking the latest norms in the US, each flushing would require six litres of water. For 800 million toilets means a supply of at least 4,812 million litres per day. Does this capacity exist?
The Report is quite clear on the matter of the utility of assets.
As the world has grown more technologically complex, an increase in income has come from an improvement both of quantity and equally quality. Goa started off as a tourist haven for thousands of $10-a-day hippies; it now looks for the same or fewer numbers at $100 a day. Modi said the country’s aim should be to improve the quality of its products so that they compete internationally and ensure an increase in real household income. And the Report stresses on its overall distribution. Chaiwallahs too should have a share! This is true across the board of services and manufactured goods.
Similar estimation is required of the so-called demographic dividend that the young age-profile of the country—50 per cent of the population is below the age of 25—should have yielded has not come through. Does it have the skill-sets? Some 49 per cent of the hundreds of millions employed in the near-zero asset creating MNREGA were between the ages of 18-35. Is this coolie economy true of any other country? Could the expenditure be considered to have a positive NPV and as adding to wealth? It fails on both counts.
There are so many similar schemes that a balance sheet needs to be drawn urgently. There isn’t much time to lose and we may be living in a delusion. On education, any number of surveys, including one by Pratham says:
“In yet another wake-up call for policy makers, the 2011 Annual Status of Education Report (ASER) compiled by Pratham says that less than one in two class V students are able to read class II level texts. While the proportion was 48.2 per cent in 2011, it was 53.7 per cent in 2010, when RTE was enforced. Similarly, only 29.9 per cent of class III students were able to handle a two-digit subtraction in 2011; the proportion was 36.3 per cent a year earlier.”
We may note that in Bolivia’s case expenditure on education was considered an investment and added back. It is arguable whether this could be done in our case.
The unemployment rate according to the 2011 census is 20 per cent in the 15-20 age group and 14.5 per cent in the 15-59 age group. There is a 12 million increase in the labour force every year. What would the demographic divided be without skilling the youth? The prime minister spoke of the need for this as well on August 15. Therefore, despite what official statistics claim, in the public mind the picture is negative on two fronts of wealth creation: natural resources and HDI. The third, produced goods, is languishing with a growth rate of under four per cent. Does the genuine savings rate need adjustment?
A hard-headed, business-minded leader like our Gujarati prime minister would have to recalibrate such schemes as support prices for foodgrains, MNREGA and unreformed food subsidy, to name a few. A day after August 15, Jaitley complained of having inherited “populist schemes” and “soft decisions”. It would be well if the nation knew in hard money terms what the NPV of such schemes is and whether they meet the criteria of sustainable and inclusive growth. If not are they going to reshaped or scrapped?
There is a whole body of analysis that suggests they will not. Any statistical jugglery justifying them would keep a majority of the people undernourished and ruin the prospects of generations to come. The NDA has a last chance and a reform of the system of national accounts should be one of the top priorities.
The Dasgupta report provides clear criteria for what can (skill development) and what can’t (unskilled employment for zero asset creation) be carried over from annual GDP to the wealth side of the ledger.
The point is that unless governments, present and future, have the kind of accounting that shows up losses and gains correctly, they will be blind to the imperatives of resource allocation and growth. Companies that fudge their balance sheets come to grief. So do countries that have unrealistic national income and asset accounts.
I read in an obscure publication called Naturenomics an article by Pavan Sukhdev that said, “You cannot manage what you cannot measure.” Hopefully the NDA will not fail on this account. The mission started by the previous PM needs to be brought to a successful end to avoid dark alleys or a quagmire. It seems time will reveal his hidden achievements.