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Number Theory: Fine print of India’s fifth largest economy status

Sep 06, 2022 10:24 AM IST

A historical look at the IMF’s World Economic Outlook (WEO) database shows that the Indian economy has made rapid gains in terms of global GDP ranking in the past decade and half.

India has surged past United Kingdom to become the fifth largest economy in the world, IMF said on September 2. The latest change in rankings is based on quarterly GDP numbers in current dollars for the period ending December 2021. India increased its lead over the UK in the quarter ending March, IMF data shows. How should one see the latest jump in the Indian economy’s global ranking? Here are four charts which explain this in detail.

The latest change in rankings is based on quarterly GDP numbers in current dollars for the period ending December 2021.(Pradeep Gaur/Mint) PREMIUM
The latest change in rankings is based on quarterly GDP numbers in current dollars for the period ending December 2021.(Pradeep Gaur/Mint)

A historical look at India’s global GDP ranking

A historical look at the IMF’s World Economic Outlook (WEO) database shows that the Indian economy has made rapid gains in terms of global GDP ranking in the past decade and half. In 1980, the earliest period for which WEO GDP data is available, India was ranked 13th among 144 countries in the world in terms of GDP in current US dollars. By 1990, this rank improved to 12 but it went back to 13 in 2005. In 2010, India was ranked 9th and in 2015 and its global GDP rank improved to 7th. IMF’s 2022 GDP estimates -- they take into account 2022-23 GDP data for India -- rank India at the 5th place and by 2027, India is expected to become the 4th largest economy in the world overtaking Germany. To be sure, the number of countries in the IMF list keeps changing, but this does not exclude the major economies and hence is unlikely to impact India’s global rankings. Another way to look at India’s economic prowess in the world is to look at its share in global GDP. This measure shows a sustained progress since the 1990s. From a share of under 1.5% in global GDP (in current dollars), the Indian economy is expected to account for more than 4% of global GDP in 2027, the latest period for which IMF projections are available.

Is India’s global GDP rank a good indicator of well-being levels?

The short answer is no. India is expected to become the most populous country in the world by next year. More people also means more workers and therefore higher GDP. However, for living standards to improve across the board, per capita incomes need to rise, which requires GDP to rise at a much faster level than population. On this count, India lags behind several countries. Chart 2 captures this lag by plotting normalized values of GDP and per capita GDP (in current dollars) for all countries for which 2022 data is available in the WEO database. The normalization has been done on a scale of 0 to 1 where 0 is the minimum and 1 the maximum. Chart 2 also shows that while India will not face a major challenge in replacing Japan as the third largest economy in the world, it will continue to have a large gap with US and China, the top two economies in the world, even in terms of absolute GDP levels. Chart 2 also highlights the burden of history which faces countries outside Europe and Northern America. Even though China has pulled off one of the most remarkable growth stories in the history of modern capitalism, its per capita GDP levels are nowhere close to that of advanced countries.

A lower per capita GDP rank does not mean everyone in India has low living standards

The fact that India’s per capita GDP continues to be much lower than its global GDP rank would indicate, does not mean that everybody is leading a life of relative deprivation in India. In fact, the fruits of growth in the post-reform period have been distributed in a very unequal way in India. While large parts of the working population continue to work in sectors with very low income shares, many other sectors have seen a significant improvement in their levels of economic well-being. A good way to capture this inequality is to look at relative share in Gross Value Added (GVA) – it is the share in GVA divided by the share in employment – for major subsectors in the Indian economy. Chart 3 has calculated these shares by using 2021-22 GVA shares and 2020-21 employment shares from the Periodic Labour Force Survey. The fact that a sector such as mining as the second highest relative income share shows that the resource extraction continues to be a very lucrative economic activity in the Indian economy.

What is India’s central economic challenge going forward?

The answer to this question has two parts. First, GDP growth itself needs to improve going forward. A compound annual growth rate (CAGR) based analysis shows that India’s GDP growth was significantly lower in the 2010-2019 period (this period excludes the pandemic’s impact) than in the previous decade and is expected to go down further in the period from 2019 to 2027, the latest period for which IMF’s GDP projections are available.

In addition to the challenge of boosting GDP growth, India will also have to make sure that such growth does not leave behind a large part of its population. While inequality has always been a concern in India’s post-reform growth story, it is likely to have increased in the period after 2016, thanks to the rapid formalization of the economy. The anecdotal evidence for such growth is not very difficult to find. For example, the Purchasing Managers’ Index for services grew at a very high rate in the three months of the quarter ending June , yet the most employment intensive sub-sector of services did not even reach pre-pandemic levels.

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