How to Measure Economic Development ? | India | Economics

In this article we will discuss about how to measure economic development in India.

GNP as a Measure of Development:

It is now important to explain how economists measure development. Prior to 1970, economic development was generally meant to be sustained increase in the productive capacity of a country over a period and was interpreted in the same sense as economic growth. Accordingly, development was measured by the growth in gross national product (GNP) or what is also called gross national income (GNI). If population was increasing faster than gross national product (GNP), the per capita income on which average standard of living depends will be declining. This means that per cent increase in gross national product (GNP) is not a true and adequate index of change in standard of living.

Besides, GDP growth rate does not consider the distribution of income. A high GDP growth rate may be achieved but this may have benefited only the rich while the share of bottom 30 per cent of population may not have received the benefits, that is, poverty of a large section of the population may not have declined. Further, if GDP growth has been brought about by the labour-saving technologies in the production of commodities, employment will not rise and therefore unemployment may rise instead of falling. Thus there is possibility that while GDP has grown, poverty and unemployment may not fall. In other words, there may be growth without development.

Another important limitation of GDP growth as a true measure of development is that it pays no regard to the composition of growing output as between essential consumer goods (which are generally called wage goods) and luxuries. While there may be shortage of food output resulting in higher food inflation, there is plenty of growth of luxuries due to gross inequalities in income distribution.

This would adversely affect the well-being of the people. Late Prof. Sukhamoy Chakravarty rightly writes, “The rate of growth strategy is by itself an adequate device to deal with the problems of generating employment opportunities and for reducing economic disparities. Much depends on the composition of growth process and how growth is financed and how benefits from growth process are distributed.”

Mention may also be made of the harmful effects on environment and depletion of natural resources which result from rapid growth of GDP. As is well known, production of modern industries pollutes the environment such as pollution of air, water and calmness which significantly reduce the welfare of the people. Though modern industrialisation has greatly increased the national output of the countries but by causing environment pollution and degradation has adversely affected the well-being and quality of life of the people. This makes GDP growth as an imperfect measure and indicator of development.

Another important drawback of GDP growth as a measure and index of development is that it focuses on the quantity of goods and services and totally ignores the quality of life that development is expected to enhance. The quality of life is related to such things as increase in the expectancy of life at birth, better nutrition and healthcare, clothing, shelter and literacy which increase the well-being of the people.

Commenting on the limitations of GDP growth rate as an indicator of development Jean Dreze and Amartya Sen write, “While economic growth is an important tool for enhancing living conditions, its reach and impact depend greatly on what is being done with the fruits of growth. The relation between economic growth and advancement of living standards depends on many factors, including economic and social inequality in general and no less important on what the government does with the public revenue that is generated by economic growth. The importance of economic growth can be adequately understood only in this broader context. It is necessary to recognise the role of growth in facilitating development in the form of enhancing human lives and freedoms.”

Per Capita Income as a Measure of Development:

Per capita income is more generally used as a measure of development and is considered as better indicator of development as increase in per capita income shows the ability of a country to increase its gross domestic product (GDP) faster than population. Increase in per capita income indicates the overall improvement in economic well-being of a population, that is, it shows how much extra goods and services are available per head in a country for consumption and investment. It is however worthwhile to note that it is real per capita income that is used to measure level of development and therefore growth or development was measured by the increase in real per capita income in a period. The increase in real per capita income is found by adjusting nominal per capita income for rate of inflation.

That is, increase in GDP per capita is equal to increase in nominal GDP per capita minus the rate of inflation.

As size of population of various countries differs sharply, the overall GDP will not correctly indicate the average standard of living because the per capita income of a country may be low because of higher size of its population, though its overall GDP is much greater than others. Therefore, for making international comparisons of development across countries it is per capita income that is more often used.

Further, in developed countries where per capita income is already very high but population growth is small, the use of GNP per capita as indicator of development may be correct but in developing countries with rapid increase in population as in case of India, the rise in per capita income will be a better indicator of development as it will depict increase in average levels of living in a country. Besides, the per capita income or changes in it enable us to keep focus on removal of poverty in the economy. Thus, income-poverty, that is, lower level of per capita income is an important component of Human Development Index (HDI) prepared by the United Nations Development Programme (UNDP).

Further, as emphasised above, increase in overall GNP or per capita GNP does not adequately reflect the problem of generating employment opportunities and for reducing economic disparities which forms the core of economic development. For increase in the living standards of the masses, much depends on the composition of growing overall GNP or per capita GNP and how benefits of growth are distributed among the population. Thus, the main limitation of per capita income as a measure of development is that it ignores income distribution which has an important bearing on the welfare of the people. It is implicitly assumed in per capita income as an indicator of development that each extra rupee of income is of equal importance whether earned by the rich or the poor.

This, however, is not correct. In fact it matters a lot in welfare terms as to who benefits from growth in GNP per capita. An extra rupee to the poor, for example, means a much higher happiness or satisfaction than the same increase to the rich. That is why in latest reports of human development by the United Nations Development Programme (UNDP), Human Development Index (HDI) is adjusted for inequality. It has been found that in the rankings of different countries with regard to unadjusted HDI and inequality adjusted HDI there is a lot of difference.

Besides, per capita income as an indicator of development also does not take into account the various ingredients of physical quality of life such as life expectancy, literacy and education, health conditions such as undernourishment and mortality rate. These basic elements of quality of life are essential for well-being of the people and are parts of new view of economic development.

Prior to 1970s the development was viewed in terms of economic growth (i. e., rise in GDP or per capita income). It was thought that benefits of economic growth would trickle down to the majority of population in the form of more employment opportunities and rise in wages. Therefore, the problems of poverty, unemployment, undernourishment and nutrition would be automatically solved if rapid economic growth was achieved. Income redistribution was given only secondary importance though in the five year plans lip service was paid to reducing income inequalities and providing equality of opportunity.

Further, prior to 1970s economic development was generally considered in terms of structural change in the pattern of production and employment so that agricultural share both in GDP and workforce was planned to fall and that of industrial and services sectors to rise. This shift in labour force was expected to lead to increase in overall productivity and economic growth as productivity levels in both organised manufacturing and services sectors was found to be higher than that in agriculture. In the table 2.1, the average annual growth rate of GDP per capita in India and some selected developing countries in the past five decades.

It will be seen from this table that even with regard to GDP per capita, in the last decade (2000- 2011) China with its annual per capita GDP growth of 9.6 %, China has emerged as the fastest growing country of the World. Next to China, India with its per capita is the second fastest growing country of the world.

However, the development experience of 1950s and 1960s in developing countries showed that the problems of poverty and unemployment remained unresolved despite the achievement in general of economic growth targets. It was therefore realised that economic growth was necessary but not sufficient for raising the living standards of the masses. As a result, there was drastic change in the meaning and measurement of economic development.

According to the new view of economic development, eradication of poverty and unemployment, reduction in inequality in income distribution, elimination of discrimination on the basis of gender (i.e., achievement of gender equality) were considered essential for development to take place. As Amartya Sen puts it “development is more concerned with enhancing the lives we live and the freedoms we enjoy”.

It is in this context that Eleventh and Twelfth Five Year Plans of India set the objective not only in terms of accelerating rate of economic growth but also to achieve inclusive growth. Inclusive growth implies that in addition to increase in GDP or per capita income the elimination of poverty and unemployment reduction in income inequalities must occur so that fruits of economic growth are equitably distributed.

It is worth noting that for measuring development the United Nations Development Programme (UNDP) has been constructing Human Development Index (HDI) for 187 countries of the world which takes into account not only income per capita but also other elements of human development such as life expectancy at birth, literacy.

Life expectancy at birth represents conditions of health and literacy represents the level of education in a country. Thus human development index (HDI) is a composite measure of income per capita (i.e., average standard of living), health and educational levels. In what follows we explain the concept of human development index (HDI), how it is constructed and give rankings of different countries of the world in respect of this human development index.