A Trillion dollar Economy

Part-I: Some thoughts

How do you measure the performance of a country? Is the single most powerful number - that is GDP – is the answer? The answer is YES and NO. It is YES because despite its severe limitations in terms of not capturing the non-market goods/services – like pollution to a mother’s care, it correlates well with numerous other substitutes that are there as alternatives including the satisfaction/happiness score. It is NO because GDP in level (without taking into account the population in the country) does not reveal the true development of a country.

Imagine a country with 100 people. Assume the combined earning of them as USD 1 billion. Take another case where there are 350 people with an earning of USD 2 billion. Which country is bigger and which country is richer? Bigger and richer are two different things. A big country may not be a rich country and vice-versa. While the country with USD 2 billion is bigger in terms of earning, it is not relatively richer as it has a greater number of people to take care of. This has led to the usage of per capita terms. The simplest measure of richness (or income) is GDP per capita. Per capita measurement assumes that income distribution is symmetrical which is far from reality. Still in the absence of any aggregate measurement, per capita income is considered for classifying countries in different income brackets.

Now let’s talk about the second indicator. Assume one person or a family or group of families hold 60% of income and wealth in a country and their income grows exponentially. Rest of the people have access to meagre resources and their income growth is abysmal. Juxtapose that with a case where the income distribution is not perfectly symmetrical but not as skewed as above. Where would you prefer to live in and work? Most people would prefer to stay in a place where access to resources is not bridled by any artificial social barrier or on the basis of their birth to a particular caste or community. Ability to work determine the income and income is not extremely concentrated in a few hands. So, while perfectly symmetrical distribution is neither desirable nor achievable, extreme concentration is also equally discouraging. ?

Therefore, the second indicator could be a measurement of inequality. It could be income inequality or consumption inequality measured through a variety of inequality measures like GINI coefficient. How fast a country is bridging this inequality is a good measure of a nation’s progress. World Inequality database (https://wid.world/ ) provides country-wise distribution of income (Top 10% share, Bottom 50% share, Top 1% share). Until 1993, from 1950 onwards, India’s income inequality was declining. It shows a sharp rise after that. It shows a rise in income of Top 10%, while the income of bottom 50% is declining. Maybe a better measure could be consumption inequality through a large-scale primary survey. Countries like South Africa, Namibia, Zambia reflect highest income inequality. Faster growth produces inequality. However, if the inequality is entrenched enough leading to deprivation, it may create social tension. So, what is the tolerable level of inequality? No straight answer. But, everyone should have the basic amenities of life and access inequality should disappear completely. One error often people make is by comparing with Top-1%. I think we should leave aside the outlier cases. We should look at the median household income and at the median person. What is the distance in income between the median household income and the income at Top-10%, Top-15% or Top-20%? Similarly, we should look at what is the distance of income of people at the bottom of the pyramid from the median and how quickly they can attain that level of income should be the discourse. However, in a society, which is extremely unequal, then that might call for a state intervention in terms of prioritizing distribution over any other goals.

The third indicator could be a price indicator like inflation. Inflation makes the poor, poorer. It has asymmetrical impact on rich and poor. A 5% or 10% rise in fuel prices or price of edible oil or cooking gas or cereal or pulses may not impact a middle class or a rich household. But it can severely impair the household budget of a poor household. Their ability to adjust their consumption against sporadic rise in prices is very limited.

A stable price regime therefore is the main goal of any central bank across the world. Macroeconomic stability and price stability become the cornerstone of monetary management. Therefore, a consumer price index based on representative basket of goods and services should be a factor while delineating the social welfare function of the country. However, there is neither a representative household nor a representative consumption basket in the real world. Instead of having one basket, multiple baskets with multiple weighting pattern maybe devised to measure the impact of price rise on various types of households with different income slab.

The fourth indicator could be unemployment. Involuntary unemployment is painful. It makes the citizen less economically empowered and also, they lose their agency in the society. It limits their capacity to fulfil their potential. No country is there with zero unemployment. There will be some degree of unemployment even when the economy is running in its full capacity. That is called by economist as natural rate of unemployment . Anything above that is a cause of concern. Unemployment statistics is poorly represented and least understood. Unpaid family worker is also considered as employed. Macro statistic hide the micro level pain. Vulnerable employment is high in India (see my earlier post ). I wrote – “India’s share of vulnerable employment is quite high. It is 73.8% of total employment. Even if you look at three rounds of recent Periodic Labour Force survey (PLFS) data of India for the year 2017-18, 2018-19 and 2019-20, on an average, 52% are in self-employment and 24% are casual workers. In the 52% of self-employment, a very small fraction is ‘Employer’ – 4.15% of self-employed. 69.35% are own account workers and 26.5% are unpaid family worker”.

Every aspiring person should have a job and private sector should take that responsibility. State would enable citizen to make them employable but the performance of the private sector would ultimately decide how many are engaged. I think it should be a stated goal without any ambiguity. A state with 10% share in GDP cannot provide employment to 50% of the population. Creating conducive business environment and allowing the entrepreneurial spirit to thrive is the only way to create jobs.

The fifth indicator could be nature/environment. E F Schumacher says in his opening line in the book ‘Small is Beautiful ’ –

“One of the most fateful errors of our age is the belief that the ‘problem of production’ has been solved. Not only is this belief firmly held by people remote from production and therefore professionally unacquainted with the facts – it is held by virtually all the experts, the captains of the industry, the economic managers in the government of the world, the academic and not so academic economists, not to mention the economic journalists”.

A book written half a century ago resonates so well even today. We treat natural resources (Minerals, Oil, gas and everything that mother earth preserved) as income instead of capital. Capital faces wear and tear and gets depleted. We may not replenish it in our lifetime or in the life time of our many generations. Still, we use it like renewable resources and our pathway to prosperity hinges on how quickly we can extract those. We must now explicitly take that into account while measuring development. We should produce a parallel statistic even if we are hesitant to replace the traditional GDP as the measuring barometer of a country’s progress. We can call it Natural Capital Adjusted GDP or Green GDP. Pollution/Emission etc should also be looked at. The moment we measure it and rank the Countries/States to show the progress, it will drive the economic activity in a sensible direction. ESG movement is geared towards that. But there is no macro statistics yet produced systematically on uniform basis for all the countries in this planet.

In summary, GDP per capita, Income inequality, Inflation, Unemployment and Green GDP or some proxy for it should constitute the social welfare function. We may call it as an ‘Gross Inclusive Index’ (GII) or ‘Gross Development Index’. Again, another index! As I said earlier, no matter we like or not, index would continue as a summary measure with all its inconsistencies.

There are many SDG goals . All of those goals are lofty goals. However, a nation’s economic progress could be better measured through a limited set of indicators while pursuing everything that is there in SDG goals. SDG must be pursued with all earnest - not just by producing paper statistics.

Part-II: A little bit of data

India’s national currency is rupee. We got a new symbol 12 years ago. India is trying to internationalize rupee which would further build resilience against sudden withdrawal of dollar from the country. India is trying to reach USD 5 trillion economy by 2026-27. IMF projects India’s GDP as USD 5.1 trillion in 2026-27 and USD 5.5 trillion in 2027-28. India may achieve a little more than this by 2026-27. While setting the goal in terms of dollar, we are taking an exchange rate risk. Also, our underlying assumption is that dollar would continue to enjoy its world hegemony for a long enough time.

But the real question is – should we talk about goals in terms of level (absolute number) or in terms of per capita?

What would be India’s per capita income in 2026-27? As per IMF, it would be USD 3,503. What would be India’s rank amongst the 189 countries for which IMF projection is available? India’s rank in terms of per capita income would be136 . By 2028-29, in all likelihood, India would join the upper middle-income country and cross the per capita income of USD 4096.

However, the aggregate number masks the performance of many states who are already reached the upper middle income country income level. They may not be ‘big’ or ‘large’ but they are ‘rich’. Those who are big may not be reach enough. What matters the most is how rich you are rather than how big you are if you have to take millions of people out of the clutches of poverty and deprivation. While big and rich are not necessarily perpendicular, sometime the bigness does not tell the full story.

Which are the States in India that are big and which States are the rich States?

I have measured the ‘bigness’ by Gross State Domestic Product (GSDP) in current price for 2020-21 and ‘richness’ is measured by Per capita Net State Domestic Product in current price for 2020-21. We have data for 31 States and Union Territories. I have expressed everything in US dollar taking the implicit exchange rate from IMF.

The rank correlation coefficient (a correlation between bigness and richness) is 0.0161. It tells that ‘Bigness’ and ‘richness’ are not at all correlated.

Let’s examine it through five tables.?

Table-1 shows the ‘Bigness’ – how big is the State economy. I have bucketed it into four groups – Large, Big, Medium and Small. Maharashtra is a large economy with a GSDP of USD 365 billion in 2020-21. I have chosen year 2020-21 because for most of the States, GSDP figure is available for 2020-21. We know many State economies contracted in 2020-21.

Tamil Nadu, Karnataka, Uttar Pradesh and Gujarat form the second group with GSDP value lying between USD 200 billion to USD 300 billion. However, more than 60% of the states in India would constitute small economy if we take GSDP<USD 100 billion as the parameter to define small economy.

How big is USD 100 billion or a USD trillion?

Reliance Industries, TCS and HDFC Bank have a market cap of more than USD 100 billion each. Infosys, Hindustan Unilever, ICICI Bank, SBI, LIC, Bharti Airtel have market cap above USD 50 billion.?Apple has a market cap of USD 2.5 trillion. Microsoft has a market cap of close to USD 2 trillion. There are many private sector players (public limited company) whose market cap is much higher than many economies.

Table-2 shows GSDP in current prices expressed in USD Billion. India is a country with States/UTs of diverse size. Maharashtra – the biggest state in the country in terms of GSDP is 92 times bigger than Mizoram – a State which became 23rd State of India in 1987. There are 10 States, out of 31 States/UT shown in the table, whose size is at least 30 times lesser than Maharashtra. Difference between Maharashtra and its nearest neighborhood in size is also significant. The other big states are Tamil Nadu, Karnataka and Uttar Pradesh.

But, does size reveal everything? Yes and No. Yes, it shows the absolute size of the economy; No as it does not talk about the people it carries. Hence, bigness and richness need to be examined together.

Look at Table-3. I have used the World Bank classification to classify States into four groups. However, remember World Bank measures GNI per capita through Atlas exchange rate method dividing it by Mid-year population. Therefore, it is not comparable to World Bank GNI number. However, just for a broad representation, I have taken that as a benchmark. I have created two sub-categories by breaking Lower Middle-Income category into two parts as World Bank gives a very broad range for that group.

Which States are richer?

Goa, Sikkim, Delhi, Chandigarh are the richest States (“very rich”). Many of you would have visited these States – at least Goa, Delhi and Chandigarh. Does it reflect in its infrastructure and facilities when you visit the State? You can think about it and form your own opinion.

The next category of States are - Karnataka, Haryana, Telangana, Tamil Nadu, Puducherry, Gujarat, Mizoram, Kerala, Maharashtra. At least 42% of nominal GSDP of all States comes from these 9 States. These States/UTs are rich and prosperous.

There are another 15 States whose per capita income is higher than USD 1046 but less than USD 2570. It combines a mix of States which are somewhat rich or not so rich. It also carries States with wider variation in per capita income. For example – Himachal Pradesh’s per capita income is USD 2470 while the per capita income of Meghalaya is USD 1107.

There are three States – Jharkhand, Uttar Pradesh and Bihar which lie at the bottom of the pyramid in terms of per capita income. In terms of absolute GSDP, Uttar Pradesh’s rank is 4, Bihar’s rank is 14 and Jharkhand’s rank is 19. However, when you take the population into account, the rank order reverses.

Table-4 shows the per capita income of States with its ranking. Some of the States which were higher in absolute GSDP ranking are now at the end of the ladder.

Next table shows how the rank reverses (rank reversal). As I stated earlier, the rank correlation between absolute GSDP ranking and per capita income ranking is very weak and the rank reversal is nothing but a tabular representation of the same phenomena.

The second column in the Table-5 shows the absolute GSDP value-based rank and the third column is per capita income based rank. The last column shows the difference between the two. The cells which are marked in red shows the maximum rank reversal – more than 10 points. The maximum reversal is by Uttar Pradesh. While its GSDP ranking is 4, its per capita ranking is 30 amongst 31 States/UT. The next three larger reversals are: Bihar, Madhya Pradesh, Rajasthan and West Bengal. For example – Bihar’s per capita ranking is 31 – the State is at the bottom of per capita income while its absolute size stands above the median State. Madhya Pradesh is the 9th largest economy in the Country. However, the moment we take into account its population, it’s per capita ranking reverses and it stands in the 25th position in per capita ranking.

Look at the table from another angle.

See the rank difference of Delhi, Himachal Pradesh, Haryana, Uttarakhand, Telangana and Tripura. Also, look at Sikkim, Goa, Mizoram, Chandigarh, Puducherry, Arunachal Pradesh and Nagaland. Their per capita income ranking is much better than their absolute GSDP ranking. Many would argue that these are small states or these states have very idiosyncratic characteristics like Goa, Puducherry or Delhi. Agree, each State comes with certain natural as well as man made advantages and disadvantages. However, the metric is same – how much income per person is having in the State? Some of the larger States like UP, Bihar, Madhya Pradesh, Rajasthan and West Bengal therefore have to cover a long distance.

Looking at the absolute GSDP and tagging it to a specific target value should also combine a per capita income target. Let’s target per capita income more explicitly.

What if?

What if some of these States attain a higher per capita income of Upper Middle-Income States or Tier-I States of Lower Middle income?

If that happens, some wonderful thing would happen. India would be more prosperous. Uttar Pradesh would be a trillion-dollar economy, Bihar and West Bengal would be more than USD 500 billion, Madhya Pradesh would be close to USD 450 billion, Andhra Pradesh would cross USD 250 billion.

However, for that to happen, the State has to attain a higher growth rate. The growth rate which is shown here is a point-to-point growth rate. Let's not forget the power of compounding. When year on year State GSDP grows, ultimately the required growth would be a little less. But undoubtedly, it is a stiff road for many of the low-income States.?This is the goal possibly should drive all of us and should ideally give sleepless night.

To conclude –

Most of the Indian States are performing really well and have registered higher growth rate than India. Many of the States are fiscally prudent before COVID unsettled the State Finances. However, this temporary shock would not permanently destabilise the economy. While many of the States are pursuing a higher GSDP agenda, it would also be useful to make the headline a per capita based measure as well. While implicitly one can calculate the per capita income when the absolute number is known, let the per capita income itself become the headline besides the aggregate GSDP number. Also, let the target be expressed both in terms of dollar as well as in Indian currency so that if dollar fluctuates enough, at least the rupee target would remain intact. Rupee is under the pressure to depreciate. But I do not think anyone is looking forward to take advantage of that in terms of attaining a goal. Let the headline take the people into account – explicitly.

This is so much about growth and development.

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