GDP And NDP Must Be Balanced

The modern concept of gross domestic product (GDP) is about nine decades old. 

It was formally adopted as the first economic measure at the Bretton Woods Conference in 1944, which resulted in the establishment of the International Monetary Fund (IMF) and the World Bank.

Critics have since criticized the priority it has received because it does not cover issues such as welfare, inequality and human development. 

GDP also does not take into account the damage caused to the environment due to economic activities. 

The effects of climate change on the people facing it are also beyond its scope. The irony is that cutting down trees increases GDP. The same thing happens after planting again.

But because of this, GDP may lose some of its current quality. Consider the increasing efforts to curb carbon emissions and climate change. 

Huge investments are being made in creating renewable energy capacities, electric vehicles are being pushed and many industries are being re-invented.

In some countries, coal-fired power plants are being closed and renewable energy is being emphasized. 

The emphasis on petrol and diesel powered cars is waning. Soon their number will start decreasing and the way for electric vehicles will be easy. 

In the coming decade, many large traditional industries will start going out of trend.

In such turbulent times, GDP can be misleading. Churning can be understood only through NDP (net domestic product i.e. GDP minus devaluation).

If a coal-fired power station is replaced by a wind or solar power plant, the net increase in economic activity estimated by the NDP would include the cancellation of the coal-fired plant, while the GDP figures would be misleading because In it, only the production from solar or wind energy will be recorded.

Devaluation has already become significant as productive assets in economies increase. The gap between India’s GDP and NDP was a little over 6 per cent in the fourth quarter of the last century. 

Now it has become about 12 percent. The gap between the two measures should widen as efforts to control carbon emissions increase.

This is because carbon-intensive production facilities will be replaced by cleaner alternatives. 

For example, the Railways is still inducting new diesel locomotives into its fleet. 

Many of them will be put to rest soon as the Railways is electrifying all its routes.

Recording these and other such changes will not capture the full depreciation that needs to be captured because general macroeconomic data may capture the depreciation of manufactured capital, but they do not capture the depreciation of natural capital such as water resources, forest wealth, ignore clean energy, etc.

India’s groundwater level has been falling for decades and is causing a crisis in farming states. 

Air pollution is affecting the health of the people. The increasing temperature in the Ganga plain will affect the health of the people. The dams being built in the Himalayas are harming the environment. 

Joshimath is an example of this. Dams themselves can also be damaged. In 2021, two under-construction dams were washed away.

To deal with these things and bring about industrial transformation, a massive change will be required. 

One consequence of this could be an increase in capital-output estimates. A high capital-output ratio simply means slow growth. Thus, GDP becomes less reliable as a leading indicator of economic activity.

Even keeping a close watch on the NDP will not prove to be enough. 

Apart from this, the country should also keep an eye on the annual change in the balance sheet of assets and liabilities. These include natural and human resources.

GDP and NDP should be viewed with such a balance sheet, just as the shareholders of a company keep track of assets and liabilities with income and expenditure documents. 

Often the balance sheet is the most important document. Where economies will adopt new ways due to climate change, the nature of economic measures will also change there

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