Today’s Talk on Editorials October 23, 2017
Economic growth: an alternative view
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 is equivalent to Rs. 2.59 trillion.
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.
Environmental Kuznets Curve (EKC) hypothesis : almost all our development policies, which are directed towards pushing double-digit income growth with little concern for environmental capital.
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.
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.
A 2013 World Bank study highlighted that in India, a higher level of economic growth maintained in the past imposed Rs. 3.75 trillion worth of environmental damage cost, which is equivalent to 5.7% of the country’s GDP at 2009 prices.
Another 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.
The values reported by the above studies are underestimates since they do not capture the wide range of economic impacts on the environment due to non-availability of data.
Identifying and quantifying the ecosystem services for the purpose of damage assessment is a difficult task in the absence of relevant data.
The actual value of economic welfare lost due to loss of ecosystem
services will be much higher than what is being currently estimated.
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. Regional poverty and inequality in income are caused by ineffective policies.
Adequate reforms in the area of pollution control with a larger role for market-based instruments such as pollution tax and tradable pollution permits are yet to be carried out in India.
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. Increased output and demand increases the value of GDP, but the corresponding environmental damage cost is not adjusted in the GDP estimation. The GDP still contains a significant amount of damage cost; as a result, the GDP is misleading since an ‘illfare’ is treated as welfare.
More environmental damage may lead to an increased level of purchase of market goods contributing to expansion of the GDP. When individuals become sick due to water pollution, the demand for medical services will rise; increase in the purchase of these market goods and services will expand the GDP size. So, more pollution damage leads to higher GDP.
The size of environmental social costs is significantly higher than the social benefits being brought about by GDP growth. The economic losses are much higher than the gains of income growth.
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.