The GDP paradox: Growth vs life at the bottom
When India’s economic progress is discussed, two numbers frequently dominate the conversation: the size of its GDP and the rate at which GDP is growing.
Both matter.
India’s rise in the global GDP rankings is significant. Moving upward becomes progressively harder as an economy gets larger, and sustaining growth rates of around 6–8% over an extended period is no small achievement.
Yet there is a question that these impressive numbers cannot answer: Are the lives of India’s poorest citizens improving at the same pace?
That is a different question, and it requires a different lens.
GDP measures the economy, not the life of the people
GDP measures the market value of goods and services produced in an economy. GDP per capita simply divides that output by the population.
It is therefore an average.
And averages can conceal as much as they reveal.
Suppose the income of the richest sections rises substantially while the income of the poorest remains unchanged. Average income will rise. GDP per capita will rise. Yet the circumstances of the poorest may have barely changed.
This is not an argument against GDP or GDP per capita. They remain important measures of economic size, productive capacity and broad economic progress.
The problem arises when we ask them to answer a question they were never designed to answer: How well are the poorest people actually living?
The poor experience growth differently
For a poor household, economic progress is experienced very differently.
Does the family have a secure roof over its head? Does it have access to safe drinking water? Does it have a toilet? Does the household have clean cooking fuel? Can children obtain adequate nutrition and escape preventable disease? Can a serious illness be treated without pushing the family into debt? Does a woman have to spend hours every day collecting water or firewood?
These are not abstract economic indicators. They determine the quality of everyday life.
A country can record strong growth in GDP per capita while millions of its poorest citizens continue to struggle with some or all of these problems.
Conversely, a government programme providing a toilet, piped water, subsidised food, clean cooking fuel or health insurance may transform the life of a poor household without producing a dramatic movement in GDP per capita.
GDP records economic transactions. It does not fully record the value of what those transactions make possible in people’s lives.
The problem with the average
The fundamental weakness of GDP per capita is not that it is wrong. It is that it is an average of an aggregate number which is not even a measure of people’s lives anyway.
If the economic gains from growth are concentrated disproportionately among higher-income groups, the national average can rise substantially while the bottom 50% see much smaller gains.
The headline can therefore say: “Per-capita income is rising.” The experience of the poor may say: “Life is still difficult.”
The two statements can be simultaneously true.
This is why the incomes or consumption of the lower part of the distribution deserve to be examined alongside GDP per capita.
If we genuinely want to know whether economic growth is inclusive, we should ask not merely how much the average has risen, but how much the least well-off have gained.
When public goods may improve lives without moving the average much
There is another important reason GDP per capita can understate improvements in the lives of the poor.
Many of the most valuable interventions for poor households are delivered not as cash income but as public goods and subsidised services.
- Food support can reduce hunger.
- A toilet can improve sanitation, health and dignity.
- Piped water can eliminate hours of unpaid labour.
- Clean cooking fuel can reduce exposure to smoke and save time.
- A house can provide security for decades.
- Health insurance or publicly funded healthcare can protect a family from financial catastrophe.
These are genuine improvements in living standards.
Yet their relationship with GDP is not direct.
A toilet contributes to GDP when it is constructed. Its continuing benefits in the form of better health, greater dignity and reduced time lost to illness, which will not appear every year as a corresponding addition to GDP.
The same is true of a household water connection. Its construction is measured. The hours of productive or personal time that a woman gains every day thereafter are not necessarily captured.
The statistical value of an asset may be recorded in the year it is created; its human value may continue for decades.
Growth is not the same as the quality of growth
There is another limitation.
GDP generally measures the value of production, not its broader social consequences.
Economic activity can increase because we build schools and hospitals.
It can also increase because we produce goods that create pollution or because environmental damage generates expenditure on cleaning up the damage.
GDP does not automatically distinguish between these outcomes in terms of their contribution to human well-being.
This matters particularly to the poor. They are often less able to protect themselves from environmental degradation, poor housing, health shocks and other risks.
Nor does GDP adequately capture leisure, safety, social cohesion, dignity or the lasting value of many assets once they have been created.
The poor can also be invisible in the statistics
There is yet another measurement challenge in developing economies.
A significant proportion of economic activity takes place in the informal sector.
Some activity and income may therefore be difficult to capture fully in official statistics.
Purchasing-power-parity (PPP) adjustments help us compare living standards across countries by accounting for differences in prices.
But even PPP-based measures cannot truly represent the purchasing and consumption realities of the poorest households.
The closer we get to the bottom of the income distribution, the more important this distinction becomes.
If GDP is not enough, what should we look at?
The answer is not to discard GDP per capita.
Only, we should stop asking GDP per capita to do a job it was never designed to do.
GDP tells us about the size and productive capacity of the economy.
GDP per capita tells us about average economic capacity.
But if the question is “Are the poor living better?”, we need additional measures.
A practical approach would be to establish a small, transparent set of objective indicators covering four broad dimensions:
- Economic capacity of the bottom half: Income or consumption of the bottom of the pyramid (bottom 40-50% of the population).
- Their Basic living conditions: Nutrition, housing, sanitation, drinking water, and clean cooking fuel.
- Their access to essential services: Healthcare, education, and other basic public services.
- Their economic security: The extent to which households are protected from catastrophic health expenditure, extreme financial vulnerability, and other shocks.
The objective should not be to create yet another complicated index in which different subjective weights determine the final score.
A transparent dashboard may actually be more useful.
It would allow citizens and policymakers to see where progress is being made, and where it is not.
The test of inclusive growth
India’s economic growth is important.
Higher growth creates employment, expands markets, increases government revenues and creates greater fiscal capacity for public programmes.
Over time, rising average incomes can certainly improve the prospects of the poor.
But the relationship is neither automatic nor instantaneous.
The central question should therefore not be: “Is GDP per capita rising?”
It should be: “Is economic progress translating into a better life for those at the bottom?”
That is a more demanding question. It is also a more meaningful one.
Look beyond the average
GDP per capita tells us how large the average economic slice has become.
It does not tell us who is getting what share of the gains.
Nor does it fully tell us whether the poorest are eating better, living in safer homes, drinking cleaner water, cooking without harmful smoke, receiving healthcare, avoiding catastrophic financial shocks, or gaining more control over their time.
Economic growth is the means. Improved human living standards are the objective.
We should therefore celebrate a rising GDP, but never mistake a rising average for proof that everyone is living better.
The real test of inclusive growth is not merely how much richer the economy has become, nor even how much richer the per capita economy has become, but how much better life has become for those who have the least.
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
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