The true measure of growth is job creation, not just GDP

INDIA ranks the highest in the world in the Innovation Efficiency Index, according to WIPO (World Intellectual Property Organisation). But it ranks a lowly 38th in WIPO's Global Innovation Index, in which the first five countries are Switzerland, Sweden, the US, the Republic of Korea and Singapore (China is tenth). Innovation Efficiency is a measure of the outcomes produced from all the inputs provided for innovation.

The Global Innovation Index is the simple average of two sub-indices: one measuring a country's performance on inputs, i.e. how much inputs it provides for innovation and the second, its performance on outputs. Therefore, a country which provides more inputs can rank high on the Global Innovation Index even if it ranks low on the output side.

Innovation inputs in the WIPO index include R&D expenditure, researchers per capita, quality of 'top universities', venture capital deals and market capitalisation. Among the innovation outputs are patent applications, scientific papers published and high-tech exports.

The WIPO's Global Innovation Index uses a resource-intensive model of innovation for ranking countries, with countries that spend more ranking higher.

India must spend more to climb WIPO's innovation rankings. It is already the highest, and has been for 15 years, in the Innovation Efficiency Index, which measures the ability to get more outcomes from fewer resources, which is a better measure of innovativeness.

When I began consulting for automobile companies in the US in 1990, my partners and I made a bet about which automobile companies would survive in the next millennium. Their thesis was that since a diversity of new products would be required to compete in a globalising economy and new product development requires substantial investment, only companies with the most financial resources would survive. Therefore, only the largest companies — GM, Ford, VW, Toyota, and possibly Nissan - would survive.

However, I bet that the small Honda would be a winner because Honda was more innovative, whereas GM would try to spend its way out of trouble. The bets were 10 to one against me. I won: Honda continued to expand in the new millennium while GM teetered on bankruptcy.

Growth, innovation, productivity and efficiency are fundamental concepts in economics and management. Economists and management consultants rank countries and companies by their performances in these parameters to spur others to catch up. More of whatever is being measured is presumed to be better and those behind are advised to adopt the practices of those ahead of them — without analysing what is being measured.

This is the fundamental problem with ranking countries by their GDP. GDP measures the size, not the health of an economy.

The health of any complex system — a human body or a nation's economy — cannot be measured by a single index. If the health of a human body was assessed only by its size and weight, the most obese persons should be the healthiest, whereas they are often the least healthy. The overall health of a human body depends on the health of many sub-systems within it — the cardiovascular, digestive, musculoskeletal and brain systems, etc.

All systems must be sufficiently healthy to keep the body well. If even one fails and the rest are in a perfect condition, the body ceases to function. Therefore, the average of their separate health indices is a dangerously misleading calculation of the system's overall health.

Weak subsystems should be cared for on priority, rather than increasing the size of the whole with the expectation that more growth will take care of everything within.

Productivity and efficiency are similar concepts. They are ratios of the amount of output from an input. The output (numerator) is what one needs more of at the time — in an economy or a company. The input (denominator) in the ratio should be what is the scarcest resource.

A universal measure applied to measure productivity is the total output produced by the number of human beings in a country or company. Productivity can be increased by innovations in production processes, to get more from the same number of people.

Or, an easier way to increase the measured productivity is to reduce the number of people employed in the production process. The use of more technology (automation and AI) enables replacement of human bodies and minds within the organisation.

Companies have the option of reducing the number of people they employ to improve their productivity by this measure. Those they discharge will find employment in other companies, they hope, or will be taken care of by the government's welfare programmes. At the same time, they don't want to be taxed to provide governments with resources for public welfare.

Compared to other countries, India has more human beings for whom it must provide employment and incomes. The people of India are expected to provide the 'demographic dividend' to its economic growth. Which they can, provided their incomes increase, and with that, the overall consumption and size of the internal market -which will attract more investments in the economy.

The right measure of productivity of businesses in India should be their output divided by the amount of capital they use. Human beings are aplenty in India; resources of financial capital are relatively scarce. Businesses in India should rely less on capital and employ more people. They must nurture the growth of human beings, not just profits.

India's economic development must be measured by how many good jobs each unit of GDP is creating (in which India is performing badly so far) rather than by the gross size of its GDP.

More wealth must be created at the bottom of India's socio-economic pyramid rather than more wealth at the top, with the expectation that it will trickle down in the future to improve the lives of the masses below. Wealth and income inequalities are increasing in India. This is not a sustainable model of growth.

Our policymakers must rethink concepts of growth, productivity and innovation. They can learn a lot about low-cost, and less high-tech, healthy growth and also about frugal innovation from within the country instead of slavishly adopting the models of the West. The West must change its ways, too, to make global growth less resource-intensive, more inclusive and environmentally sustainable.

Arun Maira is former Member, Planning Commission.