View: Being the world’s 6th-largest economy means little for India’s future

Inevitably, the headlines were football-themed. News broke that India’s GDP is the world’s sixth largest, crossing that of France, the World Cup finalist. So, news desks could hardly resist putting out stuff like ‘India scores over France’.

Keeping the copy-editing ball much closer to reality would have produced a headline like: 209-man India squeaks past 11-man France. India’s population is nearly 19 times France’s (for the arithmetically challenged, 11× 19 =209), and India’s GDP is $2.6 trillion to France’s $2.58 tn (all latest available figures are for 2017).

Yellow Card for GDP
Really, if you are going to use a football metaphor for GDP rankings, acknowledge that India’s $2.6 trillion economy houses 1.2 billion people, while a mere 67 million French produce a GDP of $2.58 trillion. Of course, as many economists rightly say, GDP figures arrived at by using dollar-local currency exchange rates always underestimate the ‘true’ size of a low-cost economy that runs on a low-value currency like the rupee.

By purchasing power parity (PPP), an exercise that seeks to find the ‘true’ value of a currency vis-à-vis the dollar, India’s current GDP is around $9.45 trillion, and its global rank is third, behind the US and China. PPP figures are often cited by experts to say that India is economically weightier than many in and outside the country think.

But even that is an almost meaningless ranking when it comes to the real question: whether India can move out of the category of low-middle income countries. Only when the average annual individual income of a citizen, in exchange rate terms, is comfortably above $4,500, is a country classified as middle income. Highincome countries are those where average annual individual income is above $12,500.

India’s current annual per-capita income in exchange rate terms is a shade under $2,000, and around $7,200 in PPP terms. Under both calculations, India is ranked between 140 and 155 globally. In exchange rate terms, the world’s sixth-largest economy has to cross a vast distance before its percapita income hits $4,500-plus, and an almost unfathomable distance before the average yearly income of its citizens goes past the $12,500 mark.

That’s how thinking Indians should respond every time a new global GDP comparison puts continent-sized, billion people India ahead of another small European country with less than 100 million population. Britain will be the next country India will move ahead of in GDP terms.

Economists calculate that India’s per-capita income needs to grow at around 6.5% every year for a decade or so — or till the late 2020s — for the country to attain middle income status. But consider this. Many countries have attained middle income status, and then have remained there for more than 20 years.

Brazil, Mexico and South Africa have spent more than two decades in the middle income category, and it could be that they never make the high-income grade. This possibility has a name in academic economics: the middle income trap. For various reasons — say, excessive dependency on a natural resource, or lack of structural reforms in the economy, or poor quality human resources, or some combination of these — countries that escaped the low-middle income category stagnate as middle-income economies.

2050 is Halftime
So, it’s quite possible that from around 2030, when India is a middle income country, it spends a couple of decades there, taking us to 2050.

Why is 2050 important? Because that’s the cut-off point in some future projection studies, for example by US bank Citi, when India becomes the world’s largest economy, in PPP terms. Other studies that put India as the world’s second-largest economy in the future also take 2050 as the cut-off point.

Some economists have noted that Citi’s projection requires India to grow at an average of just above 8% a year. Other studies that put India as the world’s second-largest economy by 2050 assume a growth rate of 7.5% to 7.7%. In these studies, India’s percapita income also attains levels that takes the country out of the middle income trap.

What all these projections assume is that India gets pretty much everything right. But analyses of the middle income trap show there’s every chance of not getting critical things right.

Growing at an average of 7.5% or 8% for 30 years is not a joke. It’s a tremendously difficult task that, for India, requires radical improvements in education and institutional quality. India’s population growth rate may well stabilise in the near future, so that birth and death rates are roughly equal.

But, even then, a majority of billion-plus poorly or barely educated Indians, governed by terribly imperfect institutions, will, at best, limp to middle income status over the next 20 years, and just get stuck there.

The kind of change that’s required for India to steadily progress towards high-income grade seems almost impossible, looking at our quality of governance now. Maybe there will be a gigantic upgrade.

Meanwhile, let’s note, France, with just 67 million people, may win the World Cup. While 1.2 billion-strong India may not qualify for the tournament even by 2030.