India is the World’s Fifth-Largest Economy, But...
Over the last few days, social media has been abuzz about India surpassing the United Kingdom (UK) and becoming the fifth largest economy in the world, behind the United States (US), China, Japan and Germany. An analysis carried out by Bloomberg said that the Indian economy became bigger than the UK’s in the three months ended March.
During the period, India’s gross domestic product (GDP), which measures the size of the economy, stood at $854.7 billion, and that of the UK was at $816 billion. And so, the Indian economy became larger than the British economy.
In fact, IMF’s 2022 forecast expects the Indian GDP to reach $3.53 trillion and the UK to $3.38 trillion. So, on the whole, the Indian economy was expected to become bigger than the British economy during this year.
All this first got the media and then the social media going. This is the kind of simplistic analysis on which social media thrives. While India beating the UK is mathematically correct, other things need to be kept in mind. The nuances need to be taken into account. So, let’s take a look.
1) Data from the World Bank tells us that UK’s population in 2021 was 67.3 million. India’s population was 1.39 billion. Data from the IMF suggests that India’s GDP (current prices) during 2021 stood at $3.18 trillion. In comparison, the UK’s GDP was at $3.19 trillion.
The point is that the economic productivity of 1.39 billion Indians was almost equal to that of just 67.3 million Britishers. So, yes, the Indian economy became bigger than that of the UK in 2022, but the productivity or the average income of an Indian continues to be substantially lower than the average income of a Britisher.
2) In 2021, IMF data showed that the per capita or the average income of a Britisher was $47,203. In comparison, the average income of an Indian was $2,283 or less than 5% of the average British income. While the Indian economy might have surpassed that of the UK and France a few years back, the average income of an Indian remains abysmally low in comparison to these countries. This also needs to be mentioned alongside the fact that the Indian economy is now the world’s fifth largest.
Further, developed countries saw sustained economic growth for over a century and, in the process, were able to pull their poor out of poverty. As a result, their social and economic indicators are much better than India’s. This needs to be acknowledged as well.
3) What is India’s position when measured on the basis of per capita income? In 2021, India was ranked 145th in a list of 193 countries for which data was available. India was placed above Kenya and below the Solomon Islands.
The UK was ranked 22nd. So clearly, the average income of Indians continues to remain very low.
4) While comparing incomes, it is also important to consider the purchasing power parity of people in different countries. Purchasing power parity adjusts for inflation or the rate of price rise, as it prevails in different countries.
When it comes to India’s GDP in purchasing power terms, India stood third in the world in 2021, behind China and the US. The UK was ninth. I sincerely wonder why this hasn’t found more play on social media as yet.
But as explained above, looking at just the overall size of the economy makes little sense without taking the per capita income into account.
5) In 2021, the average income of an Indian adjusted for purchasing power parity stood at $7,341, about 15% of the average income of a Britisher at $50,388. So, things look a little better once we consider purchasing power, but the difference is still huge.
6) Now, what is India’s position when it comes to the per capita income adjusted for purchasing power parity? India stood 128th in a list of 193 countries. The UK was at 27th position. So, the gap between India and the UK does close when we look at things in purchasing power parity terms. Nonetheless, the gap is still huge.
7) However, looking at 2021 data tells us how things are at a given time and not over a period. To overcome this gap, we need to look at data over time. Let’s first look at how the Indian economy was placed with respect to its overall size at different points in time, from 1981 onwards.
We will look at data with a gap of ten years. The IMF data starts from 1980. Take a look at the following table, which plots India’s GDP (in current prices) and India’s global rank at various points in time.
The total number of countries in the list varies over decades. That’s because new countries keep getting formed, and data for some countries are not always available. For example, consider the case of Afghanistan, which has constantly been at war with itself. The data availability for the country has been very poor over the decades.
A simplistic reading of the above table might suggest that India’s position has improved tremendously between 2011 and 2022 when the global rank improved from tenth to fifth.
But the thing to pay attention to is that the bulk of the growth that placed India in a position where its rank could improve in the past decade came between 2001 and 2011.
Also, developed countries like the UK have had a tough time on the economic growth front between 2011 and 2021. The UK grew 1.8% per year over the last 10 years. India, in comparison, grew at 5.7% annually in the past decade. It grew by 13.9% per year in the decade before that (2001-2011). Do remember these are nominal numbers which do not adjust for inflation.
Even after adjusting for inflation, growth between 2001 and 2011 was higher than the growth between 2011 and 2021. Of course, this is primarily because of demonetization, botched-up implementation of the goods and services tax and the spread of the covid pandemic.
8) Looking at the average or per capita income makes more sense. So, let’s do that. The following table shows India’s per capita income and India’s global ranking based on that.
The above table makes for fascinating reading. A simplistic view of it might suggest that India was in a better situation in 1981 and 1991 than in comparison to where it is now. After the Berlin Wall fell in November 1989, the geography of a large part of the world changed.
States forming the erstwhile Soviet Union split in December 1991, and many countries were formed. Along similar lines, the boundaries were redrawn in Eastern Europe, and new countries came into existence.
These countries were better placed than India on the economic front. Given that these countries didn’t exist in 1981 or through much of 1991, the data for these years does not reflect this.
Another interesting factoid stands out for 1981. India’s global rank stood at the 133rd position. China, with a per capita income of $288.49, was just ahead of India and Bangladesh, with a per capita income of $273.37, was just behind India.
But the surprising story here is that of Pakistan. In 1981, the per capita income of Pakistan was $497.76 and was way ahead of that of India, China and Bangladesh. (This tells us about the mess that has been created there. The per capita income of Pakistan in 2021, 40 years later, was $1562.26. This was when they were ahead not just of India but also China, as unbelievable as it might sound now.)
In 1991, the two countries just ahead of India were Bangladesh, with a per-capita income of $341.25 and China, with a per-capita income of $356.76.
Two points need to be made here. First, people who thrive on comparing the economies of India-Bangladesh came very late to the scene. The show has been on since 1991.
Second, what is well known is that the Chinese economy and the Indian economy went almost neck and neck before 1991, but what is not well known is that even Bangladesh was pretty close to China in 1991. And that’s some data point (though I still can’t get my head around the Pakistani per-capita income having been so much more than the Chinese).
India’s position improved to 145 in 2021 from 154 in 2011. But as can also be seen, the average Indian income jumped much more between 2001 and 2011 and placed us in a situation where we could go up in ranking once growth in many developed countries slowed down post-2011.
This also tells us how the economy does during one period (good or bad) impacts the next considered period. So, looking at just one period and coming to conclusions is not the right way to go about things.
9) Finally, let’s look at a table which shows India’s per capita income adjusted for purchasing parity and India’s global ranking based on that.
So, what does this table tell us? As explained earlier, the ranking fell between 1981 and 2001 primarily due to many new countries being formed. In purchasing power terms, the ranking improved between 2001 and 2011 and has continued to improve since. Again, this is because many developed countries slowed down in the past decade, whereas India has continued to grow.
What stands out is that the economic progress between 2011 and 2021, or 2014 and 2021 for that matter, was built on the progress before that
But, of course, that is not something that will set social media on fire. So, depending on their political affiliation, I expect people will take data points from this piece, twist and share them without context.
But that’s the way the world is. Most people want to understand things quickly; the context can go for a toss...
