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The long view for India
Cafe Economics | Niranjan Rajadhyaksha
China seems to have finally edged ahead of Japan to become the second biggest economy in the world. Japan said on Monday that its gross domestic product (GDP) for the second quarter was $1.288 trillion, lower than the $1.339 trillion latest quarterly GDP that China declared earlier. Only the US has a bigger economy now. The International Monetary Fund (IMF) expects India to produce economic output worth $1.367 trillion in calendar 2010, which means that the Chinese economy is now about four times larger than ours. It produces in one quarter what we produce in one year.
There is no doubt that the Indian economy has taken mighty steps in the past few decades to close the huge gap with other major economies, but this is a good time to take a long view and examine by how much we still lag the other major economic powers. It gives us some idea about the enormity of the task ahead, hopefully temper some of the current enthusiasm about the inevitability of economic superstardom and remind the government that there is still a lot of hard economic reform to be done. The data used in this column has been taken from the database provided by IMF as part of its World Economic Outlook.
India and China had comparable levels of per capita income in 1980, around the time Deng Xiaoping liberated his country from the Maoist madness and Indira Gandhi began to tentatively undo the worst aspects of her earlier economic policies. This was not too long after some pessimistic Western critics dismissed India and China as ticking Malthusian time bombs. The average Indian earned $255 in 1980, while the average Chinese earned $313.
Thirty years later, there is a yawning gap between the average incomes of Indians and Chinese: $1,124 and $3,999, respectively. India keeps company such as Bhutan ($2,042), Djibouti ($1,369), Pakistan ($1,067), Senegal ($1026) and Zambia ($1,317); even Sri Lanka ($1,806) is ahead of us. China is in the same range as countries such as Macedonia ($4,560), Peru ($4,949), Thailand ($4,402), Bosnia and Herzegovina ($4,302), Jamaica ($4,601) and Ecuador ($4,328).
We are hovering around the per capita income levels of some of the better African states, while China is now on a par with some East European and South American countries. India will have an average income of $1,681 in 2015 while China will be at $6,861, according to IMF estimates.
Yet, a large population will allow us to boast of one of the worlds largest economies and hence provide us a seat in global governance forums such as the Group of Twenty (G-20) and the IMF. India will be an oddityby becoming a global economic power before it can ensure the economic empowerment of its people. Most countries have been able to flex their muscles in international economic forums after they have achieved a certain level of mass prosperity. India has just about entered the ranks of what the World Bank calls the lower middle-income countries (per capita income of between $996 and $3,945), but has already won a place at the high table of global policy because of the sheer size of its economy. It is a welcome development, but also seems to have lulled us into a false sense of prosperity.
There is another way of looking at the issue of a large economy with very low average incomes. Twenty-two million Australians produce almost the same value of annual output as 1.2 billion Indians do. In other words, the average Australian produces nearly 55 times more than an average Indian. That is a rough indicator of the large gap in the output per worker in the two countries. Indians need access to capital, credit, skills and markets to climb the productivity ladder. It is bound to be a long and arduous journey.
All this is not to belittle the massive changes and improvements in the Indian economy over the past three decades. The economic reforms and growth acceleration we have seen have pulled millions of Indians out of poverty. Indian businessmen have been given the opportunity to build competitive businesses. Accelerated economic growth also provides the government tax revenues to build infrastructure and fund social safety nets.
China has left behind India in the past three decades. But there is no need for crushing pessimism. India today has a per capita income that is almost equal to what China had in 2002. That means India is just eight years behind China in the development racea significant gap but not an impossible one to close, especially if India emerges as the worlds fastest growing major economy by 2013-15, as investment bank Morgan Stanley has predicted in a new report released on Monday.
So the long view is not uniformly pessimistic after all.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at cafeeconomics@livemint.com
The long view for India - Columnist - livemint.com
