India's Quantum Leap
Much has been written about India leap-frogging over France to become the world's sixth largest economy. And by the end of 2018, India is estimated to surpass Britain as the world's fifth largest economy.
Cynics (and India has more than its fair share) say GDP is not the real issue. France and Britain each has one-twentieth of India's population. Per capita income is therefore what really matters. On that metric India is still among the world's poorest countries with a per capita income of just under $2,000 (Rs. 1.38 lakh). France and Britain each has a per capita income of $40,000.
All of this misses three vital points. First, per capita income should be measured in purchasing power party (PPP) terms just as GDP routinely is by both the International Monetary Fund (IMF) and the World Bank. In PPP terms, the World Bank estimates Indian GDP for 2017 at $9.45 trillion compared to $2.6 trillion in nominal terms at current exchange rates, placing it as the world's third largest economy behind China and the United States and ahead of Japan, Germany and Britain. Per capita income (PPP) in India thus concomitantly rises from $2,000 in nominal terms at current exchange rates to over $7,000.
This is tricky territory. At current exchange rates, India is a low-income country. By PPP norms, now widely used by the IMF and World Bank, India is a middle-income country. This may be statistically correct but it doesn't factor in inequality of incomes in India which are among the highest in the world. India has the third largest number of global billionaires but also the largest number of the most desperately poor people in the world. The middle-class meanwhile is growing, skewing per capita income figures further. Recent estimates place the number of Indians living in extreme poverty at a figure significantly lower than 21 per cent, the Suresh Tendulkar benchmark.
According to the economist Surjit Singh Bhalla writing in The Indian Express, "The NSSO-CE surveys form the basis of calculations of absolute poverty, an important and political economic variable in India. When the findings of NSSO-CE 2017/18 are released, they will mark an important departure of India from an absolute poverty obsessed poor country, towards a middle-class middle-income economy. It is not clear whether this fact has been absorbed by the Indian public, or Indian politicians. But absorb it they will, especially when the 2017/18 survey indicates that absolute poverty in India, according to the official Tendulkar poverty line, is in the low single digits."
Bhalla goes on to say that if per-day consumption is raised to realistic levels, the ratio of Indians mired in poverty would rise to 33 per cent, well above the old Tendulkar estimate: "The absolute poor in India today should be defined as those with a consumption level less than Rs. 75 per person per day. This means that, at present, a third of the Indian population is absolutely poor."
The second key point missed by analysts in the GDP vs. per capita income debate is that India's population is rapidly approaching a plateau. The next national census in 2021 will likely estimate India's population at between 1.35 and 1.40 billion. But fertility rates in India have already fallen below 2.1 children per woman - the replacement rate. India's population is thus likely to plateau at around 1.50 billion by 2030. China's population has already plateaued at just under 1.40 billion.
This has important consequences on per capita income. If Indian GDP growth continues at an average of 7.5 per cent a year on near-zero population growth, future per capita income (measured as a fraction of GDP against population) will increase far more rapidly than it has in past decades. China has already benefitted from this spurt in per capita income with its population having plateaued. India will now reap the same benefit.
The third key issue missed in contemporary analysis is the impact of a young, productive workforce on GDP growth and increase in per capita income. While India's demographic dividend hasn't yet been the boon it was expected to be due to low skill levels among the young, productivity is set to rise as education opportunities, including in vocational training, expand. Thus, while per capita income is a crucial metric in India's transformation from a low-income to a middle-income country, a linear analysis will not capture the complexity of India's nuanced social and economic growth. India's growth is moving along three parallel tracks, each at a different trajectory. The first is growth at the top of the socio-economic pyramid, the second in the aspirational middle layer, and the third along the large base of the pyramid comprising the poor.
What then of the future? How should the government accelerate India's quantum leap to middle-income status? Increasing GDP growth to over 8 per cent is clearly essential. At that level of annual growth, GDP will double every nine years and quadruple in 18 years. At current exchange rates, India's nominal GDP (excluding inflation) after 18 years will be $10.40 trillion, roughly similar to China's nominal GDP today ($11.20 trillion). By PPP norms, India's GDP after 18 years will quadruple from today's $9.45 trillion to around $38 trillion, higher than China's GDP (PPP) today ($23 trillion).
But the real takeaway will be in per capita income growth. With near-zero rise in population after 2030, Indian GDP per head will spurt. Meanwhile, China's rapidly ageing population will cause a fall in GDP growth. Weighed down by its inflated public debt, long-term Chinese GDP growth is set to fall to 4.5 per cent a year - nearly half India's default growth trajectory.
None of this of course will come about if the government doesn't keep its eye on the ball and double down on reforms - tax, labour, agriculture, exports and governance. India is ready to make a quantum leap out of the low per capita incomes that have consigned several hundred million Indians into dehumanised poverty. The purgatory could end in less than two decades if leaders across parties focus as much on economic policy as they do on populist politics.
