Economy
Charting a realistic path of India’s growth
Summary
- If becoming No. 3 is the concern, India is already there if GDP is measured by purchasing power parity. If India is to achieve its aspirations, it needs to address underlying bigger obstacles to push itself to a higher-income club.
India is considered to be a promising emerging market story. It grew at an average annual pace of 6.6% in the decade to 2019-20. In 2022-23, with a growth rate of 7.2%, India outperformed most other major economies. The International Monetary Fund (IMF) predicts the country will grow by over 6% in the next few years, and is on track to be the world’s third largest economy. This is creditable, but it is worth remembering that growth rate is the only GDP metric on which India does well. A different, less bullish narrative emerges when we dig deeper into the GDP data, one that gives a more realistic view of economic growth.
1. Purchasing power (dis)parity
India has already been the third largest economy by purchasing power since 2008. Measuring GDP by purchasing power parity (PPP) adjusts for differences in the cost of living across countries. Since goods and services tend to be relatively cheaper in India, Indians enjoy higher purchasing power. So the PPP method pushes India’s GDP upwards, allowing it to leapfrog other nations on this metric.
In 2022, the top five countries by PPP were China, the US, India, Japan and Russia. In 1990, the US economy was nearly six times that of India, while China was about the same size. Over time, the ratio has shrunk for the US and increased for China—both are now less than three times India’s size. PPP is a magic wand that makes India appear within reach of the world’s largest economies. But this seeming rise in purchasing power is mainly due to comparatively lower labour costs, rather than relative gains in India’s income.
2. Silver out of reach
However, without accounting for PPP, the top five economies in dollars in 2022 were the US, China, Germany, Japan and India. By 2027, India is expected to climb to third place, with an estimated GDP of $5.2 trillion. Bagging a bronze in the GDP race will not require an economic boom—simply managing a steady 6% real growth, 4% inflation, and annual 2% rupee depreciation will be enough. There is more good news. It took India seven years to grow from $1 trillion to $2 trillion, and another seven to hit $3 trillion, but the next couple of trillions should take three years each, assuming no black swan events derail growth.
However, moving up to second place will be much harder: in 2027, India will be $20.5 trillion behind China. Assuming the same pace of growth, it will take another two decades just to reach where China was in 2027, or the US in 2022.
3. Standard of living
The average standard of living in India—as measured by per capita output—is a stark reminder of the yawning gap between India and its emerging market peers. In 2022, India’s per capita gross national income (GNI) was $2,380, much lower than the other BRICS economies (China: $12,000, Russia: $12,000, Brazil: $8,000, South Africa: $6,780). Using the present yardsticks of the World Bank, India was the last of the BRIC countries to shift from low to middle-income category in 2010.
Growth in India’s per capita income has been slower and more erratic than comparable economies, which is why it continues to languish near the bottom of the heap. For example, in 1990, China and India were at about the same level, and Vietnam was much worse off. But India has been overtaken by both in the per capita race. China is approaching high-income levels, and Vietnam’s per capita income is nearly twice that of India.
4. Higher for longer
Many high-income countries started out poor. Their growth path points to the importance of consistent, continuous growth. The original Asian tigers—Hong Kong, Singapore, South Korea and Taiwan—grew strongly from the 1960s to the 1990s using an export-driven, state-supported growth model. They became role models for the tiger cubs—Malaysia, Indonesia, Philippines, Vietnam and Thailand—which in turn benefited from the stupendous rise of China. In contrast, India has seen only one continuous stretch of very high growth—in the early 2000s.
There are no shortcuts to the top. It took 50 years of strong growth for Singapore to transform from a malarial swamp to the world-class city it is today. China delivered double-digit real growth for two decades to become a global power. Each success story is backed by long periods of high growth. The early movers are already in the high-income club; in comparison, India has just started.
5. Convergence clubs
Studies show that countries form “convergence clubs" with other similar-income nations. Within each club, lower-income countries try to catch up by growing relatively faster. But no country is condemned to remain with the club it started with. Policies can be implemented to achieve the right escape velocity.
In 1980, incomes in sub-Saharan Africa and southeast Asia were comparable. By 2022, the latter had incomes nearly four times higher. European emerging economies have forged ahead of Latin American nations. The common factor in all high achievers is the use of policy intervention and structural reforms to stimulate growth. What about India? On per capita levels, it is in the company of Bangladesh and Laos, whereas it likes to compare itself to the likes of Vietnam and China. If India is to achieve its aspirations, it needs to address underlying obstacles to growth to push itself to a higher-income club.
The author is an independent writer in economics and finance.
