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You stop patting the baby, India is growing too slow

, June 25, 2015, 0 Comments

In 1991 when India announced its plans of economic liberalization the whole world saw a huge growth story developing. With the western advanced economies saturated and looking east towards poorer but hugely populated economies to drive global growth and trade, India was seeing a huge opportunity coming. India started growing faster than the Hindu rate of growth of around 3%, which it achieved on average post independence.

However, if we compare this economic performance with that of China’s, then India falls way behind. In the chart below I have indexed the real GDP to 100 for the year when both countries announced opening up of their markets. In China’s case, it was in 1978 and for India it was in 1991. Once we apply real GDP growth achieved, we get real GDP which comes out to 822 for China and 426 for India, post 23 years after liberalisation.

This means that in the first 23 years of liberalization India’s real GDP is half of what China could achieve in its first 23 years of its liberalization. India GDP grew by an average of 6.5% per year in the first 23 years of liberalisation whereas for the same period China’s grew by a staggering 9.7% per year

India China real GDP-MarketExpress-in
In terms of productivity, India is well behind major global economies. Based on my calculations an average Indian incrementally adds the least to the GDP of his country compared to it his peers across the world. Incremental GDP per person is calculated by calculating the change in GDP from its previous year and dividing the change with the total population. In a way its a good proxy for productivity of a country. Since the year 2000, close to when the acronym “BRIC” was coined and India was categorised as one of the fastest growing major economies of the future, an Indian has been adding only $92 per year on average to its GDP.

This number is the least in the set of 16 countries/regions I have used in our calculations (chart below). If we see just the BRIC nations, a Chinese national adds 5 times the number an Indian adds to its GDP, whereas the same number increases to 6.7 times and 8.5 times for a Brazilian and a Russian respectively. Multiples of developed nations are even higher. This shows that an Indian is the most unproductive among its peers and will take years to earn as much as what its peers are earning even today. With an optimistic nominal GDP growth assumption of 11% and population growth assumption of 1%, GDP per capita will increase by 10% per year in India. An average Indian will still take 17, 20 and 23 years to earn as much as an average Chinese, Brazilian and Russian respectively is earning today.

annual increment GDP-MarketExpress-in

India’s GDP per capita is not only the lowest among BRICS nations but also the lowest among all major emerging economies behind the likes of even Philippines and Indonesia. Even with a lower base, growth of GDP per capita in India has not been able to match the likes of China or Russia.

GDP per capita Brics-MarketExpress-in

To put things into perspective, China’s and Russia GDP per capita grew by 712% and 614% respectively from the year 2000 to end of 2014, whereas India’s only grew by 245%. GDP per capita Emerging markets-MarketExpress-in

Hence, I firmly believe that India is still way behind peers in terms of economic performance. Its sheer size of population makes it a powerhouse economy. However, the growth at which it has been growing is nothing remarkable given its low base.

Experts consider India like a baby who will start dominating global economics as it grows and have praised it for its potential. However, I feel the Indian baby has been given much more credit than it deserves and it could have done much better than what the world thinks.

The views expressed in the article reflect the personal views of the author.