GDP – OpenAxis

Sydney J. Harris rightly said, “Happiness is a direction, not a place” and today all economies in the world are struggling to walk in this direction. A step to achieve this was taken in the UN Sustainable Development Solutions Network in 2012 when they adopted resolution 65/309: Happiness: Towards a Holistic Definition of Development. This was done to invite the 149 member countries to measure the level of happiness among their population and use these numbers to guide public policy. Although the World Happiness Reports have been based on a wide variety of data, the most important source has always been the Gallup World Poll, which is unique in the range and comparability of its global series of annual surveys.

Finland has been ranked number 1, being the happiest country in the world for the past few years. India has always been very low on the happiness index, averaging around 125th. In fact, in 2021, India was ranked 139 out of 149 countries. The results of the happiness index are correlated with a lot of factors including GDP, social security, personal freedom, life expectancy and opinions of residents among others.

As former President, Dr Pranab Mukherjee commented, “Despite our country’s economic progress, India is constantly going downwards in the happiness index. This indicates a lack of a holistic approach towards development.” According to him, the best step that the policymakers of the country should take is to adopt the ‘triple bottom line’ accounting framework. It focuses on all essential aspects of holistic development of individuals including social, ecological and financial development. This also implies that happiness is weakly correlated with wealth and the economic growth of a country.

According to the economist and author Jayshree Sengupta, India has been ranked poorly on the happiness index due to various reasons. Some of these are rapid urbanization and congestion in cities, concerns about food security and water safety, rising costs of healthcare, women’s safety, and environmental pollution, which itself is linked to poor mental wellbeing. These conditions have worsened over time and were amplified due to the Covid-19 crisis.

The ever-growing inequality between the rich and poor of the country is another crucial reason for the chronic unhappiness. During the Covid crisis, India reportedly added 40 new billionaires to the global list while about 57% of the working class in the country were on the verge of losing their jobs. This growing pay gap in the population has worsened the mental wellbeing and hence the happiness of the population.

A statistical exercise using variables like GDP per capita, social support, healthy life expectancy, freedom to make life choices, generosity, perceptions of corruption and dystopia was done to understand the relationship of these indices with the happiness index. It found that all these variables are statistically significant and thus have significant explanatory power. They illustrate that on average richer countries fare better on subjective evaluations of life circumstances, as do nations with more social support, lower levels of corruption etc.

Why India, despite its high level of economic growth ranks so low is because it ranks very low on some of these indices. For social support, India is ranked 142nd out of 149 countries. However, if we consider Pakistan’s ranking on all of these individual indicators, it is very similar to India and worse in some cases. According to this, India should be ranked one spot above Pakistan but that is not the case. Pakistan is ranked 105 while India is ranked at 139. This points out to predictive anomalies that this model has.

One reasonable explanation for this could be that people in India have higher expectations and thus also have greater disappointment. This is one of the very crucial reasons for the low happiness ranking in India in addition to the increasing income inequality and feelings of injustice and unfairness because of the structure of the society and its history. Thus, better political leadership and public policy framework in India are essential for improving the happiness index of people in India.

Picture Credits: Visual Capitalist

Aanya Poddar is a third year undergraduate student at Ashoka University. She is pursuing a BSc. (Honors) in Economics and Finance. She is the President of the Ashoka Economics Society.

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis).

India, as with most of the world has been impacted severely by the coronavirus pandemic and the subsequent lockdown imposed by the government. While we are in the process of reopening the economy, many of us hope for a quick return to normalcy. However, According to the production and inflation data, normalcy might be a far cry for the Indian economy.

The headline figure of a decline of 23.9% in the GDP for the first quarter of financial year 2020-21 released in July showed the depth of the shock to the economy. Index of Industrial Production (IIP) shows a sharp decline in manufacturing across all sectors. Labour intensive sectors such as textiles (-37.3%), leather (-32.7%) and primary products such as basic metals (-21.6%) have been hit hard by the lockdown(Source- IIP Data and author’s calculations). As more workers get laid off, consumption declines which leads to low demand for manufactured goods, which leads to even more workers getting laid off thus creating a vicious cycle. Many pundits point to the increase in expenditure around the festive season and gradually increasing industrial production as signalling economic recovery. However, as the adage goes, one swallow doesn’t make summer, India’s economic recovery may not come easily. It faces more challenges than just production numbers as other core sectors dip significantly.

Source – IIP Data and author’s calculations

India’s economy is heavily dependent on the services and agricultural sector. The agricultural sector employs more than 50% of the entire workforce while services contributes to 50% of India’s GDP. The services sector has seen a decline of 20.6% in Q1 of FY21 in gross value added (GVA) while the trade, hotels, communication and transport sub sector is facing a decline of 47.0%.

The only sector that has shown growth is agriculture with an increase of 3.3%. This is expected as the government has imposed the least restrictions on this sector. A copious monsoon has also led to a good harvest. However since the pandemic has now spread to rural areas it could cause a reduction in the agricultural sector.

According to SBI research, manufacturing has seen a decline of 38% in gross value added. Net taxes (the difference between GDP and GVA) has declined to 1.36 lakh crore, the lowest in 7 years. The decrease in tax payments also limits the government’s willingness to spend as it increases the fiscal deficit.

The problem facing the Indian economy is threefold- demand has dipped significantly, inflation is rising and the supply chain has been disrupted. In the past year where the economy has seen a slowdown due to disruptions in the credit market, private consumption has been a significant pillar which has stood strong. In 2019, it contributed to about 57% of the total GDP. With private and public investment unlikely to increase due to underutilized capacity, private consumption will be a significant contributor to GDP this year as well. According to an SBI report the private consumption is set to decline by 14% due to the decrease in spending during the pandemic. The expenditure side of the GDP also shows a decline of 22% in demand impulses. Until the government intervenes directly to stimulate demand, we are unlikely to see a quick recovery.

India is also facing a problem of stagflation (high inflation, low growth, high unemployment) as we take a look at the latest inflation numbers released by the RBI. CPI has gone up by 11.07%, 10.68%, 9.05% in the past three months. In India, inflation is measured using two indices. The Consumer Price Index (CPI), which measures the prices the retail customer gets, and the Wholesale Price Index (WPI) which measures the wholesale price of goods and services.

The WPI came into positive territory only in August. Over the past three months, it has been 0.41%, 1.32% and 1.48%. The numbers show a clear divergence between consumer prices and wholesale prices. While one might point out this divergence may be due to hoarding/overcharging by wholesalers, this is unlikely to be the case. What these numbers point to is a supply chain disruption, wholesalers are unable to supply goods consistently to retailers leading to short term supply drops and increasing prices. This is due to the uncoordinated unlocking between states. As states continue to unlock/impose restrictions on their economies with respect to the number of cases, this trend of disruption seems to continue until next year.

Policy Proposals

The Indian establishment faces a unique challenge as the biggest shock of its existence comes to fruition. The RBI has already lowered the repo rates (the rates at which RBI lends money to commercial banks) by 125 basis points this year. By decreasing the repo rates, RBI has made it easier for banks to obtain more money which can be used for loans to the populace. The finance ministry has announced a slew of measures focusing on emergency credit lines, loan restructuring and providing support to distressed sectors such as housing under the brand name Atmanirbhar Bharat. However, as we see private consumption and investment collapsing, now is the time for even more radical measures to support the rural and urban lower class.

One way the government can find immediate impact is to increase the outlay towards the National Rural Employment Guarantee Scheme (NREGS). NREGS guarantees 100 days of unskilled work to all households for a fixed wage rate. This can be increased to 150 days to support many migrant workers who have been laid off. The wage rate can also be increased to provide further support to households. Another way of directly stimulating demand is to implement something like stimulus payments like the USA. This would directly put money in the hands of the people helping shore up demand quickly. In the longer term, a Universal Basic Income (UBI) could help mitigate these shocks. While we expect economic recovery to be quick in the coming months looking at festive demand spending and increase in industrial production. The data shows us that the path to recovery requires a lot more proactive measures from the government.

Rochak Jain is a fourth year student of economics at Ashoka University.

Image Credit: pexels.com

We publish all articles under a Creative Commons Attribution-Noderivatives license. This means any news organisation, blog, website, newspaper or newsletter can republish our pieces for free, provided they attribute the original source (OpenAxis).