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Greening The GDP: Realizing The ‘Hidden’ National Wealth

www.reviewnepal.com
  Kathmandu, Nepal      June 24 2018

 By Preeti Kapuria


Almost a decade ago, the global Millennium Ecosystem Assessment of 2005 drew attention to the importance of natural capital and ecosystem services for  human well-being.  Natural capital comprises those elements of the nature that provide valuable goods and services to humans, such as the stock of forests, food,  clean air, water, land, minerals, etc. Value, therefore, forms the very basis of natural capital concept.  Accordingly, assessing the value of changes in natural capital and the services it provides is fundamental to maintaining, restoring and managing the natural environment.  However, the goods and services (or benefits) that people obtain from the nature often lack a market or an observable price (because of their ‘public good’ nature) resulting in the value of natural capital benefits being overlooked or ignored in development planning and economic growth (Committee, 2017).

The system of national accounts currently used in most parts of the world is often incomplete in accounting for the contribution of natural resources to GDP. Even, the cost of depleting natural resources to generate income is also not represented in national accounts.

Conventional GDP estimates following the System of National Accounting (SNA) do not account for externalities, focusing only on economic growth based on income that may be unsustainable in the long term and nothing about wealth and assets (including natural capital) that can explain this income. Externalities include most material and unaccounted changes in natural, human and social capital due to economic activities.  GDP is a macroeconomic indicator, which is designed to provide the market value of all final goods and services within a country in a given period of time.

While GDP may give an idea about the size of an economy, it cannot account for the significant gains/losses to human and natural capital that determine the actual wealth of the nation. The value of consumed natural resources and environmental degradation is not accounted for in GDP estimates.  This calls for extending the traditional system of national accounts to factor in natural capital gains and losses in development planning. In other words, arriving at GDP figures that are adjusted for environmental services and consequences of economic growth (so called ‘Green GDP’).

While ‘Green GDP’ is designed to quantify value of ecosystem services derived from the nature and measure the monetary costs of environmental damage caused by a country’s economic growth, green accounting (or natural resource accounting) is a methodology for capturing the value of natural capital and externalities by estimating their stock or net asset values so that they are within a common framework of value accounting for the nation. Moreover, green accounting can lead to income sustainability (weak sustainability) ultimately leading to ecological (or stronger) sustainability.
 
Sustainability rationale for greener accounts has been around since the late 1980s. More recently  –Beyond GDP, Potsdam 2007, the G8+5 Initiative, The Economics of Ecosystems and Biodiversity (TEEB), Wealth Accounting and Valuation of Ecosystem Services (WAVES), and the Stieglitz/ Sen/ Fitoussi report, along with the Inclusive Green Economy Initiative –emphasise on  looking for better measurements of changes in human well-being. Assessments and valuation of natural capital and the change in per capita inclusive/comprehensive wealth over time are also helpful in tracking progress on most Sustainable Development Goals (SDGs).

In India not only is natural capital poorly represented in GDP; natural resources are not adequately considered as economic assets, the environmental costs of depletion and degradation of natural resources are not factored in while arriving at economic growth figures.  The externalities of economic growth not accounted for in conventional GDP estimates at times may have a huge monetary value. For example, a World Bank study shows that in 2013 India suffered a loss of over $550 billion, or 8.5 per cent of GDP just as a result of air pollution. The economic cost of other impacts, such as water pollution and land degradation, among several others, though not known, would perhaps be much more.

According to the WWF’s ‘Living Planet’ report, nearly 25 per cent of India’s total land is undergoing desertification, while 32 per cent is facing degradation. Such environmental changes have a direct impact on the future food production capacity of Indian agrarian economy.  India is expected to experience a 10-40 per cent loss in crop production by the end of the century (Datta & Surabhi, 2016).  Commenting on the state of the society due to  environmental changes that accompanied India’s economic growth from 1947-1997, the “Green India 2047” report prepared by The Energy and Resources Institute (TERI) and released in 2009,  talked about the morbidity costs in India going up to  almost 3.6 per cent of GDP every year  due to unclean air and water . The report also discussed the possibility of eight lakh deaths in the country each year because of unclean air and water.  In another estimate, the Stern Review on the Economics of Climate Change of the United Kingdom had in 2007 stated that climate change will impose costs of 9 to 13 per cent of GDP in India by 2100.

The obsession with double-digit GDP is a huge threat to India’s biodiversity and its long term economic growth.  For instance, India continues to be challenged by the loss of natural habitats and biodiversity despite having a Protected Areas network covering around 4.9 per cent of its total geographical area. This has serious implications for livelihoods that are directly based on biodiversity (Sukhdev & Bell, 2012).  About half of 380 million poor in India depend on these natural environments for daily sustainability. Around 47 per cent of GDP of India’s rural poor comes from natural resources such as harvesting of forest produce, collecting medicinal herbs from forests and fisheries (Chauhan, 2012). These people live at the margin of subsistence and are most vulnerable to biodiversity loss. It is imperative to recognise and account for the contribution of natural resources and ecosystem services to rural livelihoods through the “GDP of the poor”, a notion that encompasses all the sectors from which poor draw directly their livelihood and employment.  Such an assessment becomes even more important if India is aiming at inclusive growth process or “pro-poor” growth.

Alternative national green accounting systems

The old SNA has been revised to broaden to include resource depletion and natural environment degradation as undesirable outcomes of economic growth.  Natural capital accounting (NCA) is a method used to account for income and costs associated with natural resource use, based on a framework approved by the United Nations in 2012 called the System of Environmental Economic Accounts (SEEA). The other accounting alternatives are: Wealth accounting and valuation of ecosystem services (WAVES);  a World Bank programme working with eight countries across the world to account for the contribution made by natural resources to the wealth of the nation, and Inclusive wealth accounting (IW).

Few countries such as Canada, Australia and New Zealand have adopted SEEA in addition to their SNA, while Botswana, Colombia, Costa Rica, Rwanda and Philippines have implemented WAVES, and Australia, Brazil, china, and France have adopted IW accounting. China published its first Green GDP data for 2004 in 2006 after which the exercise was abruptly halted in 2007. The research on green GDP has now resumed in China.

Way forward

Way back in 1999-2000, India’s first pilot study on natural resource accounting was conducted in the state of Goa. After the success of the first study similar accounting exercises were repeated in 8 Indian states.  The findings of the working of these accounting methods were provided by the Technical Advisory Committee set-up in 2010 under the chairmanship of Dr Kirit Parikh. The Committee recommended the development of a National Accounting Matrix. Subsequently, the Ministry of Statistics and Programme Implementation set up an expert group in 2011 led by Professor Partha Dasgupta, , to work out a framework for green national accounts in India. India’s green GDP accounting exercise is proposed to be based on an integrated environmental and economic accounting system as a satellite system to its SNA.

Though the target of putting in place a revised functional accounting system was set as 2015, the process is  yet to be completed. Efforts are on in India to prepare a natural resource accounting (NRA) database with inputs from the states. Pilot studies have been undertaken for a number of states, including Goa, Karnataka, Tamil Nadu and Meghalaya, among others.  Starting this year, the government is planning to begin a five-year exercise to compute district level data of the country’s environmental wealth. These numbers will be used to calculate each State’s ‘green’ GDP. This is for the first time that the government has initiated a national environment survey in India. A pilot project is expected to be launched this September in 54 districts by demarcating land into “grids” with about 15-20 grids in each district. The objective of this exercise is to capture the diversity in the State’s geography, farmland, wildlife, and emissions pattern by assigning a value (Koshy, 2018).

The Green GDP is a logical step forward for India if it wishes to account for true economic growth and its holistic wealth. The current GDP estimates do not account for the gains/losses in natural capital that accompany increasing economic activity, though higher economic activity would improve GDP figures with consequent repercussions for nature and human wellbeing in the long term. The transition from extensive economic development pattern to economic growth coupled with efficiency in natural resource use and its conservation can help India attain its goals of inclusive growth with sustainable development and improved people’s wellbeing. 

Source:-Observer Research Foundation