East Asia nations can give India few lessons in growth

Post-covid, Bangladesh is set to have a higher per-capita GDP than India at current exchange rates, says the International Monetary Fund. While some have questioned the appropriateness of the comparison, others highlighted India’s failures vis-à-vis Bangladesh. Mint explores.

How do current rate, constant prices differ?

Cross-country comparison of per capita GDP in foreign currency is influenced by many factors such as the level of domestic prices, exchange rates and purchasing capacity. Some countries, for instance, keep their exchange rates lower to promote exports, even as the domestic value of the currency may be stronger. What this means essentially is that the currency may have a higher purchasing capacity in the domestic market. Any comparison of per capita income levels must therefore be done using GDP per capita at constant purchasing power parity exchange rates, as opposed to current rates.

How does it fit in India-Bangladesh context?

When we look at the per capita gross domestic product comparison in dollar terms at constant Purchasing Power Parity Exchange Rates, India is likely to maintain its lead in terms of higher per capita income in the foreseeable future even by IMF’s estimates. In purchasing power parity (PPP) terms, India’s per capita GDP in 2020 is estimated at $6,284 by IMF, as compared to $5,139 for Bangladesh. It should be noted that India’s GDP is much larger compared to Bangladesh’s, but so is the country’s population and, thus, growth in factor productivity will be critical to maintain the lead.

What about Bangladesh’s recent economic progress?

Bangladesh’s exceptional economic performance in the last two decades is beyond doubt as it emerged as a key player in several areas, including higher exports in sectors such as textiles. It is now trying to diversify into areas of manufacturing exports. It has made steady progress in social indicators such as female workforce participation, where India has seen a fall.

How has India’s GDP growth fared so far?

India’s economic performance has been decent over the last three decades, barring 2011-14 and post-2018. The current weakness has more to do with the pandemic than growth slowdown. However, since the 1950s, many countries have overtaken India in terms of per capita GDP on the back of strong reforms. For instance, East Asian economies now have higher growth rates in per capita income even as India continues to grow at 3-4%. At present, some of these countries have up to 2-3 times India’s per capita GDP, if not more.

Will others continue to outperform India?

Several countries surged ahead due to India’s lack of focus on productivity-enhancing economic reforms. The dismantling of Nehruvian Socialism started in 1991, but the lack of reforms in land, labour and agriculture sectors acted as constraints. The government has now taken steps to address such issues, but it must continue with the reforms process to ensure India experiences the same kind of economic growth as some of our competitors. This is the only way to maintain our lead.

Karan Bhasin is a policy researcher.