Fastest growing economy, but what does it mean?

economy

The International Monetary Fund (IMF) projects India to be the fastest growing major economy in the world in 2018-19, growing at 7.3% against a 6.6% rate for China. In addition, India has recently overtaken France to become the sixth largest economy in the world.

Following the well-known principle of failure being an orphan and success having many parents, both BJP and UPA may like to take credit for these achievements, each with some justification.

But consider a few facts and caveats. The fastest growth phase of India, lasting over several years, was during the UPA regime over the period 2003-8 when, on average, Indian GDP was growing at more than 8.5% per year, compared to the 7.3% projected for 2018-19. However, China was growing even faster at that time. So, India getting the top slot now has more to do with China slowing down than India sprinting faster than before.

India’s growth rate slackened during the last years of UPA-2 and has gradually picked up under the Modi regime. It should also be understood that ups and downs in growth rates often take place due to external factors like a global boom or recession beyond the control of the incumbent government. 

Further, the impact of good or bad policies of one regime may show up after a lag of several quarters, even years. By that time, another government may have taken over, taking credit or blame for policies pursued by the previous one.

That India has overtaken France is not an extraordinary event in itself. It is simply a result of India growing faster than France for a sufficiently long time. Usually, less developed countries, starting at a lower base, grow faster than the developed ones. Since India has been running faster than Germany, Japan and the US for nearly two decades and if it can sustain that momentum for a number of years more, then it will over this time overtake the GDP of these countries, too.    

No doubt, this will be an achievement, but we have a long way to go before we really catch up with them in terms of per capita income (a measure of the average standard of living) or various human development indicators (reflecting the quality of life).

As per World Bank data (2017), India’s per capita GDP, at official exchange rate, was $1,940 as against the US ($59,532), Germany ($44,470), UK ($39,720), France ($38,477), Japan (38,428), and China ($8,827). The gap would be less in terms of PPP (purchasing power parity) exchange rate (which is a better measure since it adjusts the exchange rate to reflect the true purchasing power of different currencies). But even then, the adjusted per capita GDP figures would be: India ($7,056), USA ($59,532), Germany ($50,715), UK ($43,877), Japan ($43,876), France ($42,779)  and China ($16,807).

How is the picture in terms of human development indicators? Look at the UN Human Development Index (HDI) rankings of some select countries in 2017, comprising those India aspires to overtake in GDP as well as some of our neighbours: India (131), US (10), Germany (4), UK (16), France (21), Japan (17), Sri Lanka (73), China (90), Bangladesh (139) and Pakistan (147).

Not only is India way behind the developed countries, both Sri Lanka and China are much ahead of us. Only Pakistan and Bangladesh are trailing behind India. If we focus on some specific indicators of achievement in education and health, the picture is even worse.

For example, in life expectancy at birth (in years), even Bangladesh (72) is ahead of us (68.3), not to speak of China (76) and Sri Lanka (75). Only Pakistan (66.4) is behind.  A similar picture emerges on Infant Mortality Rate and Stunted Growth in children under five.

India has the highest government expenditure (3.8%) on education as a percentage of GDP among all South Asian countries (IMF data), with corresponding figures for Sri Lanka (1.6%), Bangladesh (2%), and Pakistan (2.5%). Yet, in adult literacy rate as also in average (mean) years of schooling, Sri Lanka is far ahead of us.

In terms of Gini Coefficient (the most common measure of income inequality), China has the highest inequality (42.2), followed by Sri Lanka (39.2), India (35.1), Bangladesh (32.1) and Pakistan (30.7 — least unequal, rather surprisingly). Though we boast of higher gender equality in India than in Pakistan, in share of seats in parliament (% held by women), both Pakistan (20%) and Bangladesh (20%) fare better than India (12.2%).

Finally, how to sustain India’s status as a high growth economy, if not the fastest growing? In an excess capacity situation, it hinges on generation of sufficient demand through expansion of consumption, investment, government expenditure and/or exports. However, in a supply-constrained scenario, creation of additional production capacity through private and public investment and adoption of more productive technologies hold the key.

At a more fundamental level, broad-based economic and social development depends on the spread of education and opportunities, expanding connectivity (physical and virtual, specially between rural and urban), awareness of rights and responsibilities, strengthening of local governance and cultivation of a scientific mindset that encourages grassroots absorption of new ideas/technologies.

We have reason to be proud of some of our past scientific achievements, but our leaders should not make laughable claims like ancient India having been a master in plastic surgery, internet, aeroplanes and nuclear missiles. This kind of propaganda serves to further stifle rational thinking in the minds of people who believe that anything written in scriptures and mythology is scientific truth and sacrosanct. Such mindsets hinder economic and, more importantly, social progress.

(The author is a former Professor of Economics, IIM, Calcutta)

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Fastest growing economy, but what does it mean?

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