Grading has always been a hallmark of education at all levels, and there are no signs that it will cease being important and necessary. It can be problematic, but that does not mean that dropping it is a better alternative than retaining it.
Grading has a very important place institutionally. It provides a standard rubric for assessment that can be understood across the curriculum and even across institutions. So it is useful for communication across disciplines, for standardization, and for the completion of the institutional task of education.
Grading is also important personally. Each student when receiving grades now understands their assessment against a (hopefully) objective scale. It provides a record of achievement which can provide understanding of strengths and weaknesses, as well as provide direction for future improvement. From the professorial side, grading is the primary means of communication to the student about progress. It is a tool for helping students understand how they did against a (hopefully) objective standard.
Yes, grading is painful, but it is absolutely necessary.
Dr. Michael Burer is Assistant Professor of New Testament Studies at Dallas Theological Seminary. He is the assistant project director for the NET Bible and has contributed various studies to the bible.org site. His first book - A New Reader's Lexicon of the Greek New Testament, co-authored with Jeff Miller - was published Fall of 2008. 
I was told once (as a student) to not look at my grades, at least the important ones. Behind this statement, I think, was the question of goal/focus of the student. What is the student's goal in doing work on any given project or for any given course: The understanding?, a skill-set?, grade?, a degree requirement? Only two of those goals can be measured by a course grade or gpa (individual assignments are different).
If the student is contract grading every course for the sake of family-work-school balance, then course grades & gpa have less significance. (contract grading is aiming for less than 100 by only doing a portion of the work)
Your thoughts?
I think your comments hit on something that is important to recognize: Grades have a limited function in assessment. The function they have is quite important, but there are many other ways to measure abilities and progress. When people ask me about what GPA is required to enter the Ph.D. program at DTS, my first response is always to tell them that GPA is only one factor of many which the faculty take into consideration when examining an applicant. Often students place far too much emphasis on them and neglect other matters in their education.
Your second point is also very important. Often students will need to balance their education with other life requirements. If being a whole person with other obligations means that a course or assignment is not at the top of the list, that is ok. I remind myself of this constantly as I teach: There is not a one-to-one correspondence between grades in a class on the one hand and interest, ability, potential, etc. on the other. They are simply a limited reflection of whether an assignment or work in a course meets a particular standard.
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