Purchasing Power Matters
“India may be the fifth largest economy in the world,” mocked one well-known economist, “but we are one of the poorest nations on earth based on our per capita income of $2,650.”
The economist was right. But he didn’t explain why historically India’s per capita income has been so low. Nor did he reveal that, according to the International Monetary Fund (IMF), per capita income measured by purchasing power parity (PPP) is a more accurate measure for a nation’s well-being than market exchange dollar rates.
Consider first the history. At Independence in 1947, according to ourworldindata.org, India had a per capita income of $60. That has risen in 2023 to $2,650. This is a rise of 45x in 76 years at a compound annual growth rate (CAGR) of five per cent.
During 190 years of British colonial rule, as Dr Shashi Tharoor, Professor Utsa Patnaik and others have pointed out, in books and academic journals, Indian per capita income stagnated. In 1700, an average Englishman’s per capita income was roughly similar to the per capita income of the average Indian.
British colonialism impoverished India and enriched Britain. The level of poverty in India in 1947 was 80 per cent, literacy 12 per cent and life expectancy 32 years. It has taken three-quarters of a century to bring poverty down to less than 15 per cent, the literacy rate up to 79 per cent and life expectancy to 70 years. It is still a work in progress.
The Nehru government’s socialist policies ensured that while India prospered in relative terms to the British colonial period, per capita income grew far more slowly than in other newly independent countries like Singapore, Malaysia and Taiwan.
It was only after economic liberalisation in 1991 that India’s per capita income began to grow at its fastest pace in over 250 years.
Per capita income of $2,650 in 2023 is still abysmal. But few remember that as late as 1990 Indian per capita income was $304. Over 40 years of Nehruvian socialist economic policy had pulled India out of the British abyss but not by enough. Poverty levels remained over 40 per cent.
Turn now to the second part of the economist’s comment quoted earlier which failed to mention India’s per capita income measured by PPP.
*Why PPP?
This is what Tim Callen, former division chief in the IMF’s Middle East and Central Asia Department, wrote in a briefing paper: “PPP exchange rates are relatively stable over time. By contrast, market rates are more volatile, and using them could produce quite large swings in aggregate measures of growth even when growth rates in individual countries are stable. Another drawback of market-based rates is that they are relevant only for internationally traded goods. Non-traded goods and services tend to be cheaper in low-income than in high-income countries. A haircut in New York is more expensive than in Dhaka; the price of a taxi ride of the same distance is higher in Paris than in Jakarta; and a ticket to a cricket game costs more in London than in Lahore.
“Indeed, because wages tend to be lower in poorer countries, and services are often relatively labour intensive, the price of a haircut in Lima is likely to be cheaper than in New York even when the cost of making tradable goods, such as machinery, is the same in both countries. Any analysis that fails to take into account these differences in the prices of non-traded goods across countries will underestimate the purchasing power of consumers in emerging market and developing economies and, consequently, their overall welfare. For this reason, PPP is generally regarded as a better measure of overall well-being.”
So what is India’s per capita income (PPP) in 2023? According to the IMF’s World Economic Outlook published in April 2023, India’s per capita income (PPP) is $9,070.
Because living costs are much lower in India than in the US, the IMF gives each country a PPP multiplier to accurately adjust economic well-being by taking local factors into account. For low-cost India the multiple is just over 3x. For middle-income China it is under 2x.
As a result, GDP figures measured by PPP change significantly. According to the IMF’s latest World Economic Outlook, India’s GDP (PPP) is $13,030. China’s GDP (PPP) is $33,070.
None of this suggests India should be pleased that the economic gap between China and India has fallen from five times to a little over two times when per capita income at dollar exchange rates is adjusted for PPP. It simply means that India must redouble efforts to deepen economic reforms. Poverty levels – still unconscionably high – must be reduced as quickly as possible.
The key is turbocharging economic reforms in investment and infrastructure. Government capex is smartly up in 2023-24. Private investment too is increasing as bank credit offtake surges.
Despite muted private investments so far, the corporate sector is bullish. As Business Standard reported: “A dipstick survey of 22 CEOs across India shows that over 86 per cent of the respondents have invested in the past one year and they plan to do more in the coming months. Several CEOs said the government’s plan to invest Rs.10 trillion in new roads, highways, and railways would result in new orders for their companies. As a result, companies are expanding capacity. The Reserve Bank of India’s recent statement also indicated a rise in capex as project loans to the private sector by banks showed fresh sanctions at 2.2 per cent of loans in FY23 (versus 1.3 per cent in FY22).”
To become a fully developed country by 2047, the centenary of Indian Independence, as Prime Minister Narendra Modi has targeted, will require deep reforms and strong resolve.
