Temporary Decline in India's Per Capita GDP Compared to Bangladesh's is No Major Worry, but There are Other Challenges
Projections by the IMF suggest that India is among the worst-affected developing countries due to the lockdown and our economy is expected to contract by a little more than ten per cent in the current fiscal. As a natural effect of the decline in GDP, our per capita GDP is also expected to decline to USD 1,877 as against USD 1,888 for Bangladesh.
- Last Updated: November 03, 2020, 17:13 IST
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The latest World Economic Outlook report of the International Monetary Fund (IMF) has created a sensation after it highlighted that Bangladesh's per capita Gross Domestic Product (GDP) is expected to surpass India's in the current year. Though the IMF regularly publishes such reports, this time it acquired particular significance because it was released in the wake of the Covid-19 crisis. Analysts are gauging the current economic situation and recovery prospects.
Projections by the IMF suggest that India is among the worst-affected developing countries due to the lockdown and our economy is expected to contract by a little more than ten per cent in the current fiscal. As a natural effect of the decline in GDP, our per capita GDP is also expected to decline to USD 1,877 as against USD 1,888 for Bangladesh. It is important here to highlight that historically India’s per capita GDP has been higher than Bangladesh's and the current-year decline is an exceptional occurrence caused by the pandemic. In fact, the same report of IMF suggests that India will overtake its neighbour in the next year itself. Achieving a positive growth rate despite the Covid crisis goes to the credit of Bangladesh and it deserves to be applauded for this.
Overall GDP numbers can be a good measure for the economic performance of a country but GDP in purchasing power parity (PPP) terms is a useful indicator if someone is doing per capita analysis. Purchasing power parity eliminates the differences in price levels between countries and it is useful because it considers the impact of exchange rates. GDP PPP is generally used to compare the living standards in countries and the IMF report highlights that despite negative growth in the current year, India’s per capita GDP in PPP terms will stand at USD 6,284 while the same number for Bangladesh will be USD 5,139. It is illogical to compare the Indian economy with Bangladesh's and if mere per capita GDP is the criteria for economic supremacy then Sri Lanka and Bhutan stand higher compared to many larger nations.
A detailed analysis of the report reveals that long term-growth projections for India are better compared to our peer China. The IMF has shown India’s GDP growth consistently higher than China's from next year onwards. Growth projections for next year stand at 8.8 per cent for India and 8.2 per cent for China while the gap is consistently increasing from 2022 onwards. Apart from this, inflation holds a key position in deciding the lifestyle and savings potential of the common public. India’s consumer price inflation is the lowest among south Asian countries.
If we compare ourselves with our Asian neighbours, then everything looks fine. But there are a few challenges and red flags emanating from the IMF report.
i. IMF data has highlighted higher debt/GDP ratio of the country which is increasing on a year-on-year
basis. Debt as percentage of GDP stood at 68.77 in 2015 and it is expected to cross 89 per cent
in 2020. This is much higher than the 61.7 per cent debt level of China. A higher debt
increases the interest payout and leaves fewer resources for productive purposes. Though
there are various factors involved while determining the sovereign credit rating but for a
perspective it may be highlighted here that recently Moody’s downgraded India’s rating by
one notch to BAA3 and restored it at the November 2017 level.
There can be an argument that many developed nations have higher debt/GDP ratio, but they
have formalised economies which gives their governments the ability to raise resources quickly.
ii. Our GDP is declining and revenue as a percentage of GDP is also declining. It stood at 20.23
per cent in 2018, then came down to 19.3 per cent in 2019, and is expected to decline
further to 18.08 per cent in 2020. This is primarily coming from the corporate tax rate cut
announced in 2019 but the objectives of the tax cut are not achieved. Even the RBI report released
months ago highlighted that the tax rate cut has not translated into increased investment.
A decline in revenue will increase the reliance on non-tax revenue with major focus on
disinvestment which has its own complications.
iii. India’s Gross National Savings has declined significantly from 31.06 per cent of GDP in 2015 to
28.8 per cent in 2019 and is expected to decline further. For a comparison, China’s GNS/GDP ratio
is more than 40 per cent and domestic savings are necessary for capital formation in a
developing economy. Policymakers are facing challenges to increase consumption and
savings both which have opposite relation to each other.
The IMF report highlights the challenges of the Indian economy but a temporary decline in GDP per capita as compared to our neighbour is certainly not among them. Indian policymakers need to come out of complacency to gain the growth lost due to Covid-19.