India’s GDP gap with US, China is widening alarmingly

Claims and speculations about the US going into a recession and India being an economic bright star are highly exaggerated

The International Monetary Fund (IMF)’s GDP database shows that the world GDP crossed $100 trillion, in current US dollars, in 2022: it was for the first time ever. The global GDP was about $34 trillion at the turn of the century. This milestone is momentous: global GDP trebled in 20 years.

In 2019, a year before Covid-19 pandemic, global GDP was a little over $87 trillion, with the United States’s GDP amounting to $21.38 trillion, China’s amounting to $14.34 trillion, and India’s GDP amounting to $2.84 trillion.

Off late there is a lot of brouhaha about the US economy falling into recession, whereas India registering world-beating GDP growth. The facts, however, are not sanguine.

For 2022, three years after all the Covid-19 disruptions, the US GDP has grown to $25.46 trillion, China’s GDP to $18.1 trillion, and India’s GDP to $3.39 trillion.

The US and China have added GDP of $4.08 trillion and $3.76 trillion respectively in these three years. At the same time, India could add only $0.55 trillion. Both the US and China have added more than India’s 2022-23 GDP ($3.39 trillion) during this period.

Given this, are we ratcheting up our GDP growth to catch up with the US and China, or is India’s GDP gap with the US and China widening uncomfortably?

Double depreciation of rupee

We all see INR-USD in terms of nominal exchange rates. Roughly Rs 69 equalled $1 on December 31, 2019. On December 31, 2022, it required nearly Rs 83 to get $1. The INR depreciated by about Rs 14 (or 20 per cent) in these three years. The nominal GDP, though boosted by Indian inflation, is reduced by INR’s depreciation.

There is another factor — the US inflation — the effect of which, however, usually gets missed out. The US’s real GDP growth is worked out after adjusting the USD for inflation. The US’s GDP was $21.38 trillion in 2019. If we were to account the inflation adjusted real US growth, a contraction by -2.8 per cent would bring down the US’s real GDP to $20.78 trillion in 2020, the 5.9 per cent growth in 2021 will take it to $22.01 trillion, and the 2.1 per cent growth in 2022 will make real US GDP amount to $22.47 trillion. This, however, is not done. The US’s GDP is stated by the IMF in current US dollars.

Therefore, to compare apples with apples to assess India’s relative performance, India’s GDP of $2.67 trillion (in 2020-21), $3.15 trillion (in 2021-22) and $3.39 trillion (in 2022-23) needs to be juxtaposed against the US’s nominal GDP of $21.06 trillion (in 2020), $23.06 trillion (in 2021) and $25.46 trillion (in 2022) and not the inflation adjusted real GDP.

Measuring the US’s GDP in current dollars dramatically transforms its low GDP growth during 2019-2022 from 1.67 per cent in real terms to a quite high growth of 5.99 per cent. India’s GDP growth at 6.08 per cent during this period looks impressive against the US’s real GDP growth of 1.67 per cent, but not so great compared to the 5.99 per cent growth in current US dollars.

The Chinese yuan did not depreciate much against the US dollar during this period, thereby delivering a robust GDP growth of 8.07 per cent per annum — which is much higher than India’s growth.

The truth is, not catching up, but the GDP gap is only widening.

A bright spot?

A few days back, Finance Minister Nirmala Sitharaman, in a boast-like now-deleted post, termed India a bright star again having become a $3.75 trillion economy — the fifth largest.

The IMF has projected India’s GDP to grow to $3.75 trillion in 2023-24. There are nine months still to go in FY 2023-24. Let us look at IMF’s numbers to see how bright is India’s star shining.

India’s GDP, in current US dollars, was $1.86 trillion in 2013-14; it grew to $3.39 trillion in 2022-23. Our annual compounded GDP growth for the period 2013-2022 turns out to be 6.9 per cent; and is at 5.85 per cent during the four years between 2018-19 and 2022-23.

India’s annual compounded GDP growth from 1990-91, the year after the economic reforms began, to 2013-14, the year before the Narendra Modi-led Bharatiya Janata Party (BJP) came to power, was 7.81 per cent over a 23-year period. It might not please Sitaraman to know that India’s compounded dollar GDP growth between 2003-04 ($0.52 trillion) and 2013-14 ($1.86 trillion) was much higher at 13.59 per cent!

Against this backdrop, India’s last 4-year GDP growth of 5.85 per cent does not look exceptionally bright.

Tough policy reforms

There is an unnecessary attempt from various quarters to claim and project that the economic performance under this government has been exceptional, whereas the facts are quite on the contrary.

Instead of this misleading projection, it will do India’s economic prospects good if the focus is on real and tough policy reforms to raise the GDP growth to levels of 8-10 per cent per annum for the next 20-25 years to make India a real bright star and to serve the people well.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘Explanation and Commentary on Budget 2023-24’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.