The IMF flags various challenges for the Indian economy but a temporary fall in GDP per capita as compared to Dhaka is certainly not among them
The International Monetary Fund’s (IMF’s) World Economic Outlook released recently caused a sensation after it highlighted that Bangladesh’s per capita Gross Domestic Product (GDP) could surpass that of India’s this year. Our economy is expected to contract by a little more than 10 per cent and our per capita GDP, too, is projected to decline to $1,877 as against $1,888 for Bangladesh. This naturally created a flutter as historically our per capita GDP has been higher than our neighbour’s and the current decline is an exceptional occurrence caused by the pandemic-induced lockdown. However, the report also suggests that we will overtake that tiny nation next year and India’s per capita GDP in Purchasing Power Parity (PPP) terms will stand at $6,284 while it will be $5,139 for Bangladesh.
Though overall GDP numbers can be a good measure of the economic performance of a country, the GDP PPP is a better indicator if someone is doing a per capita analysis. This is because PPP eliminates the differences in price levels between countries and also considers the impact of exchange rates. Hence, the GDP PPP is generally used to compare the living standard between countries. However, it is absurd to compare because the Indian economy is way bigger than Bangladesh’s. For instance, our forex reserves are more than $555 billion while its reserves are a puny $39 billion. Moreover, per capita income also involves another variable — the overall population — and is arrived at by dividing the total GDP by the total population. Bangladesh’s economy has been witnessing massive GDP growth since 2004 but even then this pace did not alter the relative positions of the two economies between 2004 and 2016. This was because India grew even faster than Bangladesh. But 2017 onwards, India’s growth rate slowed while Bangladesh’s growth accelerated. Over the same period, India’s population grew around 21 per cent while Bangladesh’s population was just under 18 per cent. And if mere per capita GDP is the criteria for economic supremacy, then Sri Lanka and Bhutan have done better compared to many larger nations.
Plus, a detailed analysis of the report reveals that long- term growth projections for India are better as compared to China. Projections for next year stand at 8.8 per cent for India and 8.2 per cent for China while the gap consistently increases from 2022 onwards. Also, inflation is a key factor in deciding the lifestyle and saving potential of the common man and India’s consumer price inflation is the least among South Asian countries.
So, if we compare ourselves to our Asian neighbours, then everything looks fine. But there are a few red flags which the report throws up. First, is the higher debt-GDP ratio of the country which is increasing on a year-on-year (YoY) basis. Debt as percentage of the GDP stood at 68.77 in 2015 and it is expected to cross 89 per cent this year. This is much higher than the 61.7 per cent debt level of China. A higher debt increases the interest payout and leaves fewer resources for productive purposes. Though there are various factors involved while determining the sovereign credit rating but for the sake of perspective, it is pertinent to highlight here that recently Moody’s downgraded India’s rating by one notch to BAA3, the November 2017 level. We can argue that many developed nations have a higher debt-GDP ratio, but then they have a formalised economy which gives their Governments the ability to raise resources quickly. Something which we don’t have.
Second, our GDP is declining and revenue as percentage of the GDP is decreasing, too. It stood at 20.23 per cent in 2018 and then it came down to 19.3 per cent in 2019. It is expected to decline further to 18.08 per cent this year. This is primarily coming from the Corporate Tax rate cut announced in 2019. Sadly, the objectives of the tax cut were not achieved. Even a Reserve Bank of India report released a few months ago highlighted the fact that the tax rate cut has not translated in increased investment. This decline in revenue will increase the reliance on non-tax revenue with major focus on disinvestment, which has its own complications.
Third, India’s Gross National Saving (GNS) has declined significantly from 31.06 per cent of the GDP in 2015 to 28.8 per cent in 2019 and is expected to fall further. In comparison, China’s GNS-GDP ratio is more than 40 per cent and domestic savings are necessary for capital formation in a developing economy like ours. Policy makers are facing major challenges in increasing consumption and savings, both of which are vital for the growth of the economy.
The IMF report highlights various challenges facing the Indian economy but a temporary decline in GDP per capita as compared to Bangladesh is certainly not among them. Indian policy-makers need to come out of their slumber and shed their complacent attitude to reviving the economic growth that we have lost due to the Coronavirus pandemic.
(The writer is a Chartered Accountant and an economic analyst)