What are the defects of conventional national Income Accounting. What is the alternative method.

 Prof. Mahendra Kumar Ghadoliya

Our national income data are useful indicator of economic health of a country. Gross Domestic Product measures the level of economic activity and indicates the variations in these activities.
It is the most widely used index of the economic strength of a country. For years together economists consider it a measure of  economic growth and the per capita income as an indicator of standard of living. The GDP measures the monetary value total production irrespective of the fact that how has it been achieved.  Marshall defined the National income  as follows:

“The labour and capital of a country, acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds and net income due on account of foreign investments must be added in. This is the true net annual income or revenue of the country, or the national dividend.”  (Principles of Economics, 1920, p. 434)

The definition clearly recognizes the fact that the labour and capital use natural resources to produced goods and services. But how much quantity of these resources have been used is not accounted for. As these natural resources were considered as free gifts of nature. Land, water, air minerals are given to us by nature and therefore does not enter in the economic cost and price. Due to this faulty definition we exploited nature to its maximum without considering the adverse impact on the environment.  After some years when we started feeling the harmful effects of environmental degradation it was realised that the economic growth which the world has achieved is not sustainable. 

It is now believed that the development alone does not matter, it should be sustainable so that our posterity may live in the same comfort, which we had if not better. 

System of National Accounting (SNA) has three main defects:

Defects:    

(a)    It neglects the depletion of natural capital such as land, forests, water, minerals etc.

(b)   Environmental pollution is not reflected in the SNA.

(c)      Expenditure incurred in facing the external effects of environmental degradation becomes the part of SNA. 

In recent years, a new system of sustainable accounting, known as Green Accounting, has emerged. “It permits the computation of income for a nation by considering the economic damage and depletion in the natural resource base of an economy”.

Meaning of Green Accounting:

“Green accounting is a type of accounting that attempts to factor environmentalcosts into the financial results of operations. It has been argued that gross domestic product ignores the environment and therefore policymakers need a revised model that incorporates green accounting.”Wikipedia, (https://en.wikipedia.org)

On 21^st April, 1993 the 'Earth Day' US president Clinton said in his address from White House  that the Bureau of Economic Analysis should come out with a ‘Green GDP’ measure that would incorporate changes in the natural environment into the calculation of national income and wealth. This was the beginning of Green Accounting or Environmental Accounting for sustainable development. 

The development path we have followed in the past has caused serious threats to the environment and in the name of growth we have polluted water in the rivers and seas, denuded forests, heated up the globe and depleted ozone layer. The development should be without destruction i.e. it should be sustainable development.

To me,“sustainable development is the development that rationally utilises the available resources natural as well as man-made so that present as well as future generations may satisfy their needs comfortably.” The concept of sustainable development is not static but dynamic in which exploitation of resources, the direction of investment, the orientation of technological development and institutional changes are made consistent with present as well as future needs. The notion of more fully incorporating the use of natural resources and the environment into the national accounts have been called Green Accounting.

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