India growth story and the way ahead

As an Indian studying in Norway, I find it intriguing that the rest of the world is fascinated by India’s growth story. I often meet people who genuinely believe India is going places and is the next economic superpower. I sometimes think that they are just trying to be polite, and their optimism stems from ignorance about India as well as all the positive coverage India gets in the global media. Although India does get more than its fair share of negative publicity (women rights, rape and sexual assault on women, caste system, poverty, homophobia to name a few), it also draws a lot of praise for its rapidly growing economy and its flawed but functional democracy. It might also be the case that foreigners have so little expectations from India that half decent news (7% GDP growth from such a low base) surprises them. 

Although many social scientists doubt GDP per capita as a measure of economic development, as an economics student I believe it is the most accurate indicator. GDP and GDP per capita are calculated either in nominal terms or are adjusted for purchasing power parity (PPP). Both methods have their advantages and disadvantages. I will keep the discussion about the relative merits of one another for another post and here will try to chart India's growth path and see where it leads us. All the data I have used in this post is from IMF 2015 report. This data is available on the IMF website and can be accessed for free.

Let's start comparing India against China since global media loves to do it and a lot of Indians believe that the two countries are comparable. Although the two countries have roughly the same population (India at 1.27 Billion and China at 1.39 Billion in 2014 as per United Nations Department of Economic and Social Affairs), China's GDP is around $11 Trillion while India's $2 Trillion. The Chinese economy is more than 5 times the Indian economy and hence direct comparison doesn't make sense. If we consider PPP adjusted GDP, India stands at $8 Trillion against China's $20 Trillion. So even when we adjust for prices (which is precisely what PPP does), an average Chinese is almost 2.5 times richer than an average Indian. So the question is how long will it take for India to catch up with China? The answer could be forever because China has got such a big head-start that India is destined to play the catching game in the conceivable future.

Recently India was in the news because the central government managed to get goods and services tax (GST) bill approved in the parliament. Although it might take years before the bill is implemented successfully, economists unanimously agree that this bill has the potential to add 1-1.5% to India's GDP growth every year. India's long-term real GDP growth as estimated by various think tanks is at 7.0% and an additional 1.5% from GST implementation can lead to long-term real GDP growth of 8.5%. This is the real GDP growth rate and it ignores inflation which is a part of Nominal GDP growth rate. The nominal GDP growth rate has two components namely real GDP growth rate and inflation. Although the economy grows at Nominal GDP growth, economists consider the real GDP growth rate as a better indicator for growth because inflation adds no value to either economy or people. 

GDP per capita growth depends upon two things: GDP growth and population growth. Annual GDP per capita growth rate can be roughly calculated as annual GDP growth rate - annual population growth rate. It is reasonable to expect an annual population growth rate of 1.5% in the near future for India and that leaves us with an annual GDP per capita growth rate of 7% (8.5%-1.5%). Now 7% annual increase leads to an approximate increase of 100% in 10 years. So in 2025, India's GDP per capita would be double of 2015. 20 years of 8.5% growth (7% annual GDP per capita growth) will increase the GDP per capita by 4 times, still behind China's current levels in nominal terms. So in 2035, India's GDP per capita will be 80% of China's current GDP per capita. Although if we consider PPP adjusted GDP per capita, India should be at China's current level in less than 15 years (There are a few assumptions regarding prices in India, prices in USA and exchange rate of USD to INR involved in PPP prediction). China's per capita GDP is $8,000 in nominal terms while $14,100 in PPP adjusted terms. The corresponding numbers for India are $1,600 and $6,200. So, India's nominal GDP per capita will touch China's current level in 2039 while in PPP adjusted terms, India should equal China's current GDP per capita as early as 2027.

Let us try and see at this growth rate, how long India will take to reach the current GDP per capita of some of the other comparable economies. Let's start with Thailand, a decent sized middle-income country with a GDP of $395 Billion. As in 2015, Thailand's GDP per capita in nominal terms was $ 5,750 while PPP adjusted stood at $16,000. So at a real GDP per capita annual growth rate of 7%, an average Indian will reach the current level of average Thai in 2034. If we consider PPP adjusted GDP per capita, the corresponding year is 2029. Again PPP estimates involve a lot of assumptions on price levels and currency exchange rates.

Table 1 gives estimates of GDP per capita in India reaching some other countries in both nominal and PPP adjusted basis. Malaysia is chosen because it is a mid-income country from Asia, albeit richer than both China and Thailand and has grown significantly over the past 4 decades. South Korea, although classified as a mid-income country by IMF, is a technology superpower and is richer than many countries in the European Union. Poland is again a middle-income country and has grown rapidly over the last decade. Although it is one of the poorest countries in Europe, it is much richer than India and like India is a global hub for outsourcing and IT related services. It is highly unusual for a country to grow at 8.5% over long periods and for a country of similar size as India, only China has a proven track record in growth. I will end the post here and let the readers draw their own conclusions on India growth path.

Table 1: Year in which India’s GDP/Capita will be equal to current GDP/Capita of different countries

Source: www.imf.org, own research

PS: India will be at Poland's current level in 30 years, and Poland is considered a developing poor Eastern European country. So if India is really lucky with its growth, it can aspire to become a poor European country in 30 years :)