Macroeconomics

Getting to a greener picture of India's growth story

  • Blog Post Date08 May, 2013
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Varad Pande

Dalberg Global Development Advisors

varad.pande@dalberg.com

The Expert Group on Green National Accounting calls for including natural as well as human capital in our national accounts, and defining economic growth in terms of ‘wealth per capita’ instead of ‘GDP per capita’. In this Note from the Field, Varad Pande argues that this is a step in the right direction, discusses implementation issues and calls for a new robust cost-benefit rubric for new projects.

There is a raucous debate on the “environment versus growth” issue in India. Unfortunately much of this debate is based on ideology, and not grounded enough in data and evidence. So we have the environment wallahs arguing to stop a mega-mining project, while the growth wallahs arguing equally forcefully that the same project is critical for India’s development. The growth wallahs tell us that we must chase the holy grail of economic growth, while the environment wallahs ask us what use is such growth if it comes at the cost of environmental ruin. There doesn’t seem to be a robust cost-benefit rubric that can objectively ground this debate in facts.

The question then is if 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 his direction.

Greening India’s national accounts

The Government of India appointed an Expert Group on Green National Accounting in August 2011, headed by Sir Partha Dasgupta of Cambridge University, perhaps the most pre-eminent environmental economist in the world today. The Committee just submitted its report this week to the Prime Minister. 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 Twelfth 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 to expand the notion of national capital to include, in addition to physical capital, both ‘human capital’ - the population’s skills and well-being; as well as ‘natural capital’ - the nation’s ecosystems, land, water, sub-soil 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 ‘GDP per capita’. It is possible, for example, that in a forest-rich, timber-exporting country, ‘GDP per capita’ is increasing impressively, while its ‘wealth per capita’ is falling, because its natural capital (in this case its forests) is being razed ruthlessly for exports and thereby fuel its GDP growth. In such a case, it is not clear that that this country is growing sustainably and its ‘economic growth’ numbers should be adjusted to reflect the fact that it is drawing down its long term natural assets (forests) (without adequately re-investing in its human or physical capital).

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

Implementation challenges

It is hard to disagree with these elegantly argued propositions put forward in the Report. What is more challenging, however, is implementing this new paradigm. For one, the value of natural assets (what economists call “shadow prices”), are extremely hard to estimate – so 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 sequestration1, 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 fairly long-term roadmap for this.

The way forward

The onus is now on the government, having commissioned this Report, to operationalise this new approach. 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 eminently sensible choices and trade-offs as a nation. Some other emerging economies, like China, moved in this direction, but have since slowed down because the results are not always flattering when one accounts for the environmental costs of the growth process (the World Bank and the UN are leading global efforts to standardise rules for such national accounting).

While this ‘greening national accounts’ exercise will help address the so-called ‘growth versus environment’ debate at a macro-level, there is also a need for an improved cost benefit rubric at a micro-level - 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 rubric for new projects that explicitly accounts for environmental and social externalities2.

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 the Officer on Special Duty to India’s Minister for Rural Development. Views are personal. A version of this column has appeared on Live Mint (www.livemint.com).

Notes:

  1. The process of removing carbon from the atmosphere and depositing it in a reservoir.
  2. An externality is a cost or benefit arising from an activity of a party that affects another party, which is not involved in the activity. For example, air pollution from manufacturing activities that affect the health of the entire society is a negative externality of manufacturing activities.
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