Where does India stand in the world order? The country’s sheer size has made it one of the Brics, along with Brazil, Russia and China, though it is by far the poorest of the group. India has also recently demonstrated its credentials as the world’s largest democracy. The success of India’s educational elite in US corporate hierarchies and entrepreneurial ventures has also burnished the nation’s image. However, other benchmarks are less encouraging.
Consider what India’s citizens get for exercising their electoral power. In the 2005 Governance Indicators of the World Bank, India is in the 47th percentile in “control of corruption”, and in the Corruption Perceptions Index of Transparency International from 2002, India is tied for 88th place with countries such as Benin, Mali and Tanzania. Governance also affects the ease of doing business and the overall business environment. The World Bank undertakes a comprehensive annual exercise on the ease of doing business in a large number of countries. In the latest exercise, India ranks only 122nd out of 180 countries, well below China (83), Pakistan (77) and Mexico (56), though similar to Russia and Brazil.
In a more contentious exercise, India was recently ranked 115th out of 157 countries in the 2008 Index of Economic Freedom (IEF), produced by the Heritage Foundation and The Wall Street Journal. IEF is broader than, and encompasses, the World Bank’s Doing Business rankings. While the producers of IEF tout it as an indicator of economic potential, it may not be that accurate. China does worse than India on IEF, but has grown consistently faster, and is much richer. Perhaps a better measure of India’s standing is how well off its citizens are, in terms of a range of human needs. The United Nations’ Human Development Index (HDI) uses life expectancy, literacy and education measures, along with per capita incomes, to measure well-being. India ranks only 128th out of 177 countries on that measure. Unsurprisingly, perhaps, HDI and IEF are strongly positively correlated. Strikingly, though, China does much better on HDI, ranking 81st. Setting aside China’s income advantage, the biggest difference in components between the two countries comes in life expectancy and literacy, more so than education.
Even if India does poorly now, doesn’t it have great potential? The analysts at Goldman Sachs who dreamed up the Bric grouping came up with an index called the Growth Environment Score (GES), meant to capture the determinants of growth as they have been identified in many empirical analyses of global growth experiences. In some ways, GES is an amalgam of the features of the IEF and HDI measures (current conditions also matter for potential), but with some additional emphasis on technological capabilities. According to GES, China ranks 16th among 133 developing countries, Russia 44th, Brazil 58th, and India is not far behind, with a rank of 60.
An additional set of factors that distinguish GES from indices that measure institutional quality and human development are indicators of actual macroeconomic performance: inflation, government deficits, external debt and investment rates. India has been doing well on the macroeconomic front, improving its GES ranking, but these indicators are also subject to rapid deterioration.
Country rankings based on such indicators are very sensitive to the components used. In late 2007, The Economist magazine ranked 15 large emerging economies according to potential economic risk, and India finished at the bottom of that table. This ranking was based on just four component variables: current account balances, budget deficits, credit growth and inflation. At about the same time, the Economist Intelligence Unit’s more comprehensive assessment of country risk, with four broad categories, and subcategories in each, told a different story. The four broad risk areas were political, economic policy, economic structure and liquidity. A numerical score was constructed, and a letter grade assigned, essentially representing a risk class. The numerical scale went from zero (least risky, graded A) to 100 (Iraq scored worst among 150 countries, with 87, and got the only E). India scored 51, which earned it a C. Brazil was at 47, China at 45 and Russia at 57—but these all earned the same C. The use of institutional factors in this scoring makes it very stable—little has changed for the Bric scores since 2007, despite the global economic crisis.
This week, the four Bric leaders will meet in Russia to discuss the global financial crisis and reforms to the world’s financial and trade institutions. In a way, this is a sequel to the Group of Twenty (G-20) summit, and India’s membership in this quartet marginally enhances its global clout. But its standing in the world will really change only when it succeeds in significantly improving its institutions and economic policies to deliver better lives to its citizens—that doesn’t depend on the consonant countries in Bric, but on the I itself.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org