Typical India: High GDP growth, Low HDI Rank

Posted on February 11, 2010

Praveen Kumar:

In the past two decades, India has been making sustained progress on a scale, size and pace that is unprecedented in its own history. Real GDP growth had averaged 5.8 per cent in the 1980s and 1990s, accelerated to 8.6 per cent in the period FY03 to FY06 and peaked to 9.4 per cent in FY07. If the current GDP growth rate of around 9% is maintained, India can propel herself into elusive club of high growth economies. However, this undisputed record is also accompanied by dismal Human development rankings. India has been consistently ranked very low. (In 2008, it held 128th, behind Palestine, Iran, Congo, Botswana and Srilanka). This article tries to understand the meaning of high GDP growth and low HDI rank.

Gross Domestic Product:

Gross Domestic Product is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. It means India as a nation has consumed $1.2 trillion last year for its various needs. GDP growth rate of x% implies that India as a nation’s consumption has grown by x% over the previous year.

It can result in increased disposable income in certain sections of society, not necessarily all the sections; and more availability of money for Indian government to spend, not necessarily more purchasing power.

Firms employ separate accounts for benefits (revenues) and costs (outlays). The GDP, how-ever, adds benefits and costs together. According to Stiglitz, “No one would look at just a firm’s revenues to assess how well it was doing. Far more relevant is the balance sheet, which shows assets and liabilities. That is also true for a country.”

In addition, a decline in stocks that represent value or welfare is not taken into account (e.g. natural gas in the earth). An additional shortcoming is that GDP covers the costs of the provision of certain public goods, such as national defence, even though it is evident that the costs of public goods cannot serve as an adequate measure of the benefits associated with these goods. According to the 2009-10 financial budget figures, India plans to spend officially $29.52 billion for defence and its allied sector. In India’s $1.2 trillion GDP, at least $29.52 billion have no direct bearing or less bearing on social welfare of citizens on that accounting year. Finally, many private goods show diverging private and social costs because of all kinds of market failure, including imperfect competition, price agreements and technical-physical externalities.

Mishan (1967) and Daly (1977) conclude that GDP must be considered as an estimate of the total cost of all market-related economic activities in a country.

Their actual benefits or real welfare effects are unobserved, that is, not measured by means of GDP. As an implication, GDP growth should not be considered as an indicator of progress, but as a reflection of increasing costs of economic change (whether progress or decline). This explains why GDP and welfare growth do not necessarily coincide.

Human Development Index:

The HDI combines normalized measures of life expectancy, literacy, educational attainment, and GDP per capita for countries worldwide. It is claimed as a standard means of measuring human development–a concept that, according to the United Nations Development Program (UNDP), refers to the process of widening the options of persons, giving them greater opportunities for education, health care, income, employment, etc. The basic use of HDI is to measure a country’s development.

The HDI combines three basic dimensions: Life expectancy at birth, as an index of population health and longevity. Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrolment ratio (with one-third weighting). Standard of living, as measured by the natural logarithm of gross domestic product per capita. The Human Development Index (HDI) then represents the average of the following three general indices:

Life Expectancy Index(LEI) = ((LE – 25) / (85-25))

Education Index (EI)= (0.667 x ALI) + (.334 x GEI) ALI is Adult Literacy Rate, GEI is Gross Enrolment Index.

GDP = [log (GDP pc) —log (100)] / [log (40000)-log (100)]

HDI measures quantity and quality and includes life expectancy, literacy, and real GDP/capita. Objectivity is a major problem with any index. HDI is no exception. Assignment of weights is an example of arbitrariness without justification and the HDI index is sensitive to the weights assigned. A more serious criticism of the HDI is the weighting of each rank order of the country by 1/3 (LEI, EI, GDP) and summing the weighted ranking of the three indicators.

The flaw here is the problem of application of ratio scales on ordinal magnitudes. Economist Bryan Caplan has criticized the way scores in each of the three components are bound between zero and one, so rich countries effectively cannot improve their ranking in certain categories, even though there is a lot of scope for economic growth and longevity left.

“This effectively means that a country of immortals with infinite per-capita GDP would get a score of .666 (lower than South Africa and Tajikistan) if its population was illiterate and never went to school.”

The rank correlation coefficient between real GDP/capita and life expectancy, real GDP/capita and literacy; and literacy and life expectancy are .90, .80, and .89, respectively. HDI is also correlated with GDP/capita (.87). Composite indexes are not sensitive to variability in components or the imbalance in components, e.g., a country with low means but high literacy. “The HDI is not reflecting the human development idea accurately. Dasgupta and Weale (1992) point out the fact that it is an index restricted to the socio-economic sphere of life; the political and civil spheres are in the most part kept separate. Perhaps this argument can explain why politically unstable countries like Palestine, war-ravaged Congo and Botswana are ranked above India. Moreover, the inequalities inside countries and between genders are not considered in the index. This argument explains why Iran is placed much higher than India in HDI rankings.

Another strong critic comes from the idea that both components of HDI are prob-lematic. The GNP in developing countries suffers from incomplete coverage, measurement errors and biases. The following component, life expectancy in many countries, are a mathematical estimation and do not come from collected data. The definition and measurements of literacy are different among countries and also, this data has not been available since 1970 in a significant number of countries.

In summation, numbers such as GDP growth and HDI rankings reflects a less ideal picture of social upliftment and delivery of public goods. The overvaluation and enthusiastic uses of these indices alone as a public policy guide can be biased and dangerous. It is highly recommendable to use progress indicators like male adult and female adult literacy rates, Below Poverty Line rates (both monetary value and calorie intake), access to basic healthcare, primary education, etc., in line with United Nations Millennium Development Goals.

It is necessary to right emphasis the scope of greater generic indicators like GDP and HDI, and also equally necessary to acknowledge the fact that they are just necessary conditions, and not sufficient conditions. So, higher GDP and lower HDI, without development means very little to the population of 1.2 billion.

Every effort has to be made to make sure that higher growth is achieved and also the objective growth of growth, which is human race development, is attained.

The writer is a correspondent of Youth Ki Awaaz and also an MBA student at IIFT.

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