The current method of calculating GDP treats the costs of environmental damage as income
India’s GDP growth rate slows over the past five quarters has generated panic. A decrease in the GDP growth rate from 7.4% in January-March 2016 to 5.7% in April-June 2017 is equivalent to ₹ 2.59 trillion. Most commentators claim that a lower GDP growth rate will have a negative impact on the growth of employment, income and livelihood opportunities.
A silver lining?
However, there might be a silver lining to a lower growth rate. This is especially true from the point of view of long-term sustainability of the economy; it can bring significant economic well-being through improvements in the quality of the environment. Economists concerned with sustainable development advocate low levels of economic growth, because with large increases in national income, there are negative environmental consequences such as pollution. These adversely affect the quality of the environment and the economic well-being of individuals and households who depend on the environment for their basic livelihood.
It seems to be the Environmental Kuznets Curve (EKC) hypothesis that underlines almost all of our development policies, which aim to push double-digit income growth without worrying about environmental capital. The EKC hypothesis is represented by an inverted U-shaped curve illustrating the relationship between per capita income and environmental deterioration. He suggests that during the initial period of economic development, when per capita income is low, deterioration in environmental quality caused by rapid industrialization and urbanization is inevitable. Society will have to accept a certain level of environmental damage resulting from income-generating activities, as large-scale income growth is essential to achieve other development goals such as mass job creation and reduction of poverty. poverty. 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 quality of the environment to desired levels. Thus, growing income on a higher path brings a long-term win-win outcome where poverty is reduced and environmental quality is improved.
In reality, the EKC is almost a myth, because an increase in per capita income does not bring desirable levels of environmental improvement. In fact, empirical evidence across countries shows that various attempts to increase per capita income lead to further deterioration of the environment. Large numbers of the poor depend on the environment for their daily activities and therefore a greater focus on improving the quality of the environment can stimulate income growth on a sustainable basis.
The Indian context
Studies that have attempted to estimate the economic costs of environmental damage in India have revealed striking results. For example, a 2013 World Bank study pointed out that in India a higher level of economic growth sustained in the past has imposed a cost of £ 3.75 trillion in environmental damage, 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 air pollution in India alone caused a loss of well-being equivalent to 7.69 % (approximately $ 31,316.2 billion) of its GDP in 2013.
Estimates of the cost of damage differ considerably from one study to another due to differences in the methodology and data used. Likewise, the values reported by the above studies are underestimated as they do not capture the wide range of economic impacts on the environment due to the unavailability of data. For example, the environment generates a range of ecosystem services such as supply services (food, irrigation, drinking water), regulatory services (climate regulation, water quality regulation), cultural services. (recreational and religious services) and support services (nutrient recycling, soil formation). Identifying and quantifying them for the purposes of damage assessment is a difficult task in the absence of relevant data.
In India, millions of households and economic activities use these ecosystem services for production and consumption. Although economically very valuable, ecosystem services are not traded in markets and therefore their true values are not reflected in the system. Therefore, the real value of the economic well-being lost due to the loss of ecosystem services will be much higher than what is currently estimated.
Pollution control reforms
Another problem is that the current method of estimating GDP treats the costs of environmental damage as income. As development policies give more priority to income and job creation, the implementation of pollution abatement policies is very poor. For example, pollution control measures implemented in the bleaching and dyeing plants in Tiruppur, Tamil Nadu, for more than 25 years, have failed to reduce pollution. In fact, the measures not only led to the closure of these units in 2011, but had already caused significant irreversible damage to the health, agriculture and livestock sectors in this region. Regional poverty and income inequality are caused by these ineffective policies.
Adequate pollution control reforms with a stronger role for market-based instruments such as pollution tax and tradable pollution permits still need to be carried out in India. At present, the price of a good from a polluting unit only covers the cost of private production and not the cost of damage. This makes the commodity relatively cheaper, resulting in increased demand and production, as well as higher pollution and environmental damage costs. The increase in production and demand increases the value of GDP, but the corresponding environmental damage cost is not adjusted in the GDP estimate. The GDP always contains a significant amount of damage cost; therefore, GDP is misleading because an “illusion” is treated as welfare.
Likewise, more environmental damage can lead to an increase in the level of purchase of marketable goods contributing to the expansion of GDP. When people get sick from water pollution, the demand for medical services increases; increasing the purchase of these market goods and services will increase the size of the GDP. So, more pollution damage leads to higher GDP.
An important lesson from empirical studies of environmental damage is that the size of environmental social costs is significantly larger than the social benefits resulting from GDP growth. This means that if we try to increase income and employment in traditional sectors, we lose them in other sectors that depend on the environment. Sometimes the economic losses are much greater than the gains from income growth.
Since GDP growth and environmental damage have a strong positive relationship, lower GDP growth could be beneficial. Although there is uncertainty in determining the ecologically desirable growth rate, maintaining a growth rate of 5-6% with strict environmental regulations is believed to significantly reduce environmental damage. An appropriate assessment of the environmental social benefits and the social costs of income growth is warranted so that policies can be oriented towards securing environmentally sustainable growth rates. Efforts to develop environmental accounting and green GDP for India can help us achieve sustainable development in the future.
L. Venkatachalam is Professor, Madras Institute of Development Studies, Chennai