Of late there has been a lot of enthusiasm on the size of the Indian economy. The numbers being spoken about are $5 trillion or $7 trillion along with the rank of the same in the pecking order. While this sounds good and is an achievement, on deeper thought, this is a truism. It is not surprising that China and India will both dominate the stage mainly due to the size of their populations. The combined population of these two nations is 2.8 billion out of a total of around 8 bn, which provides the size and scale that is required. In fact given the population dynamics, these two countries are the largest markets for any investor and it is not surprising that every company wants to have a slice of the cake by being in these countries. India, of course, has the advantage of being a progressive democracy.
India stands fifth in the global ranking when it comes to GDP based on current prices. It may be recollected that over a decade ago, India’s stature rose further when the concept of calculating GDP based on the purchasing power parity (PPP) theory was applied. Based on PPP we would be third, and also twice the size of Japan which we trail in the conventional method. Intuitively India and China will only increase their size and rank with time. Interestingly, if China’s nominal GDP increases consistently by just 6% and India’s by 12%, it would take 30 years for us to cross their GDP mark. Therefore it is a truism that India and China would be the largest economies for quite some time.
But it is often argued that the size of any economy goes up in case there are too many people, and what matters is the per capita income. This concept too may not be perfect as it does not say anything about the distribution of income. This is where the inequality matrix comes in, where the higher income groups account for a larger portion of the nation’s wealth and income. India’s rank slips to 120 when per capita income is reckoned at current prices in the conventional sense. In fact China, which tops the list under PPP, slips to 72 when it comes to per capita income. USA also goes down to 8. The per capita income in nominal terms would be just $2,389 for India as against $8,379 under PPP. In case of China it would be $12,598 and $21,476 respectively.
Just to get a fair idea of prosperity, the per capita income for USA is around $76,000. While there are smaller nations with much higher per capita incomes, the smaller population pushes up their income which is above $127,000 and $145,000 for Luxembourg. USA would be a better benchmark as it is the third most populous country. Indonesia, which is the fourth most populous country and is around 16th in the pecking order on the basis of nominal GDP, has a per capita income of between $4,500- 14,600 on these two scales of conventional and PPP approaches.
It can be recollected that in the eighties, when growth models were drawn up, the choice was between planning from below and above. The latter meant that the focus would be on increasing the size of the cake which could then be redistributed to the less fortunate. This was different from the paradigm followed prior to reforms, when the policies were geared towards those at the bottom of the pyramid which helped to alleviate their positions. Both the models had their advantages.
Once reforms were introduced and pervaded all fields, the growth model has been to go back to the top-down approach where the productive sectors were to deliver growth at a high pace and in the process take the economically weaker sections along so that there were opportunities for all. This has happened for sure, though not at the desired pace. This has meant that there has been a tendency for the government to still chip in with a large number of transfer schemes to help those at the lower end. Almost Rs 10 lakh crore is spent annually by both the centre and states as transfers for the underprivileged. While this is necessary, given the state of income distribution, it is also indicative that the trickledown theory has worked quite slowly.
As scale keeps getting built it is also necessary to equip people with better capabilities, and it is here that it is necessary to invest in health and education. These are the prerequisites that should be met before we think of anything else. Only then can we think of moving up the value chain in terms of skilling and creating more jobs. The not-so-good truth is that even today, the government is supporting 800 mn people through the free-food scheme, which means that it is necessary. This can reduce only in case people are more employable and jobs are created at all levels. Today the country excels at the highest levels of skills, as in IT and finance where India has made a name overseas. Also there is a plethora of opportunity in terms of jobs at the unskilled levels like construction, or services in retail and logistics. These address the present issue of earning an income, but are not sustainable.
This appears to be the missing link in our growth story. There have been aggressive policies at the centre for providing housing, gas cylinders, drinking water, roads etc. In developed countries a large number of services are paid for by the consumer. But given the inability for people in the lower income echelons to afford the same, the government has stepped in. It is an effective way to kickstart the process, but we need to move over to a system where people are able to pay for these services, which is possible if they have a good education and are healthy. This should be the way forward.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal