India now sixth largest economy: What does it mean for the average Indian? Not much, if you drill down numbers
The average Indian is far poorer than the average Frenchman if one compares per capita income at PPP. The Modi government must move quickly to fix cracks in the 71-year old economy
India is moving up in the coveted list of the world’s largest economies. According to World Bank data, last year, the country became the world’s sixth largest economy beating France. That’s indeed another good talking point for the ruling Bhartiya Janata Party (BJP) led by Narendra Modi as the 2019 poll campaigns approach. But, this muscle growth was bound to happen anyway due to India’s consistent growth pace over the years.
Consider this: Just in the last decade, India has doubled the size of its economy outpacing that of France. While India's GDP has risen by an average 8.3 percent over the decade, that of France's actually declined by 0.01 percent. To add more perspective, in the past 10 years India's GDP grew by 116.3 percent (from $1.201 trillion in 2007 to $2.597 trillion in 2017) while France witnessed a 2.8 percent decline in GDP (from $2.657 trillion in 2007 to $2.583 trillion in 2017). Certainly, this tells us that India is gaining economic size consistently and is emerging as one of the powerhouses.
But what does India’s ascension in the list of world economies mean for Indians looking from within?
Not much, if one looks at the per capita income graph of major economies and where India stands among them. To understand this, just look at the per capita income at PPP (purchasing power parity) in both India and France. Going by the latest available figures on World Bank's website, India has an estimated per capita income of $7,060 while France has $43,720, some six times more than that of India. India ranks at the 123th position when it comes to per capita income at PPP while France ranks at the 25th position. An average Indian is far poorer than the average Frenchman if one uses this yardstick.
Now, why are we talking about per capita income at PPP? Because that’s one important metric in US dollar terms used worldwide to compare the income levels of citizens of different countries. It gives us a picture of the relative performance of different countries.
The size of the economy is linked to the size of geography, its population, and workforce. India has a population of 1.34 billion while France has 67 million. If one talks about the prosperity of the people in an economy, PPP is the right metric to look at. One reason why India has a much lower PPP compared with France is the difference in population (per capita is the total size of the economy divided by the total number of people in that country).
But that isn’t necessarily the dominant factor though. China, which has a population of 1.4 billion has a per capita income of $16,760 (ranked 77th in the world). The obvious inference here is that India should have grown at a much faster pace and in much greater size to level some of the inequality in per capita income levels.
The big evidence lies in the not-so-satisfactory employment scenario in the country. Has gaining economic muscle helped India improve the employment scenario significantly over the years? The ruling BJP and its sympathisers have consistently maintained that the problem is not with a lack of jobs but lack of data.
Almost 80 percent of all Indians rely on the informal sector to make a living -- a large chunk of them are still dependent on farming, the contribution of which to the economy has shrunk from 50 percent at the time of independence to 15-16 percent now.
Output hasn’t increased but farming still constitutes one of the largest areas of employment. That’s one reason why the poor remain poor and live in distress. Even today, India doesn’t have solid payroll data but the unemployment rate is believed to be quite high. China, UK, and Germany have a 3-4 percent unemployment rate while France has close to a nine percent rate.
According to the Centre for Monitoring Indian Economy (CMIE), the unemployment rate in India reached a 71-week high in the week ended 25 February. It is possible that February 2018 will end with the highest unemployment rate in the past 15 or 16 months. The unemployment rate has been rising steadily since July 2017, the CMIE said.
Till recently, India was home to the largest number of poor in the world but it got rid of the dubious title, as cited by a Brookings study, which said, “At the end of May 2018, our trajectories suggest that Nigeria had about 87 million people in extreme poverty, compared with India’s 73 million."
When Narendra Modi took over in 2014, he promised a manufacturing revolution. The share of manufacturing and agriculture as a share of GDP has been shrinking and it is on the back of services that the Indian economy has been managing its growth story.
As a share of GDP, the manufacturing sector contributed 17.4 percent in fiscal year 2012, dropped till fiscal 2015 before showing a mild uptick. In fiscal year 2018, manufacturing as a percentage of GDP stood at 18.1 percent. Remember, as part of the 'Make in India' campaign, the government wanted to increase the share of manufacturing to GDP to 25 percent over a few years, but, after four years, there has not been much progress.
However, a visible improvement is seen in services. From 18.9 percent of the GDP in fiscal year 2012, the contribution of services to GDP has improved to 21.7 percent in fiscal year 2018. In fact, this is the only segment which has lifted the momentum in GDP growth in a big way, whereas, despite multiple campaigns such as 'Make in India', manufacturing has refused to pick up significantly.
There are economists who believe that GDP growth would have been far higher in fiscal years 2015-16 and 2016-17 if demonetisation had not happened in the economy in November, 2016.
The government refutes this argument by saying that the note ban set the stage for greater formalisation in the economy of India and will aid future growth.
The debate is on. But, while debating a course correction, India will have to repair its fault lines even as it gains economic muscle.
(Data support from Kishor Kadam)
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