Indian Economy | India and the Global Economy Download PDF
In an earlier section, we had seen the combined output of the global economy of being USD 75 trillion in 2013, with one-fifth accounted for by the US economy of about USD 16 trillion, making it the largest economy of the world. That is the importance of the US economy.
It was previously mentioned that the international comparisons are being performed through two yardsticks, one the conventional exchange rate and the other adjusted exchange rate also known as purchasing power parity (PPP) basis. PPP is an adjustment made to the conventional exchange rate to capture differentials in purchasing power for meaningful comparisons of economies. This is done by freezing a common set of goods freely traded, which can be bought for USD 1 and then the price of the same set in other economies. Say conventional exchange rate is USD 1 = Rs. 63 but it terms of PPP say it is USD 1 = Rs. 9, then adjustment will be by a factor of 7.
PPP has wider acceptability as a measure of global comparison, whereas transactions are done on conventional market-determined/pegged exchange rates.
Various institutions such as IMF and World Bank do ranking of different economies in terms their GDP, per capita GDP etc., and all ranking is after denominating the parameters in USD. Ranking by them can vary but not divergent.
Position of India
First, by the conventional exchange rate, World Bank has ranked India tenth largest globally, with the output crossing USD 1 trillion to reach USD 1.8- trillion. The second [ largest economy after the US is China with an output of USD 5 trillion, followed by Japan, Germany and Russia. Even though India has joined the USD 1 trillion output club, its share in global output is 2.4 per cent.
However, by using the adjusted exchange rate or PPP basis, India’s output increases to USD 3.3 trillion making it the fourth largest economy after US (USD 15.6 trillion), China (USD 12.4 trillion) and Japan (USD 4.3 trillion). It can also be seen that China has displaced Japan as the second largest economy of the world and at the present levels of growth can well become the largest economy of the world in the next 2-3 decades. This is what is meant by the changing global dynamics or shifting of the axis towards Asia and more particularly towards China, India, S. Korea, etc.
The GNI per capita is often seen as a measure of increased income of the people, which is the total output divided by the population. This has its own limitations but still useful enough to give a reasonable comparison of income levels across economies. The rank in GNI per capita globally, for both India as well as China, is very low whether seen from conventional exchange rate or PPP basis.
India’s GNI per capita in PPP basis is USD 3840 while it is USD 1320 by the conventional method, with a very low rank. China is slightly better placed than India but still low by global standards of a rank of just over 100. Let us look at GNI per capita of other countries. The highest GNI per capita is that of Monaco of over USD 200,000 followed by Liechtenstein at USD 140,000 and Luxembourg USD 105,000. US with its GNI per capita of USD 49,000 is ranked eleventh in the world.
What is the implication of this for India? In comparison to these economies, India is a poor country despite having an output of over USD 3 trillion. Is it because of the large population base? Yes, it can be said so. All the other economies of the world have far lesser population, which translates into a high GNI per capita, not true for countries such as India and China.
What can be done about this? The implication of this is that while output of countries such as India and China are good by the global perspective but not sufficient enough for the domestic economy. The answer thus has to be rapidly expanding output to increase income levels and improve our global rank, but this will happen slowly and over time spanning decades.
Human Development Index
What would you understand by ‘Human Development’? We have seen earlier that India’s output (GDP) is the tenth largest in the world or by saying that India is the fastest growing economy in the world after China or that India is the second largest market again after China. Yes, these are statements of fact.
However, we have also seen the low rank in GDP per capita. Realizing that modern economics lacked measurement standards for human development in the overall growth process, two noted Asian economists Dr Mahbub U1 Haq (Pakistan) and Dr Amartya Sen (India) formulated the Human Development Index popularly known as the HDI in the nineties. The first comparison of economies based on HDI was during 1990.
This index is simple, completely objective and measurable to track down the governmental efforts for ‘basic’ human development efforts and useful for ranking countries of the world. The index today has global acceptability and forms the basis for ranking of countries by UNDP in their Human Development Report.
Only three parameters are used in the index. The parameters, their relative weight in the index, their minimum and maximum values is given below:
|Parameter||Weight||Maximum Value||Minimum Value||Formula|
|Life expectancy at birth||1/3||85 years||25 years||(Value for the country – minimum value) divided by (maximum value under the parameter – minimum value)|
|Education index of which:||1/3|
|(i) Adult literacy ratio||2/3 of 1/3||100 per cent||0 per cent|
|(ii) Gross enrolment ratio||1/3 of 1/3||100 .per cent||0 per cent|
|GDP per capita||1/3||USD 40,000||USD 100|
The value or the index would range from 0 to 1 and is taken up to 3-digit decimal. The closer the value to 1 it is said good efforts at human development and value lower than 0.300 is said to be not satisfactory. The methodology and criteria has been slightly modified from 2010 by making it more scientific first by converting each of the three parameters into an index.
Secondly, adult literacy and gross enrolment index has been refined into an education index comprising (a) Mean years ofcschooling index (number of years that a 25-year-old has spent in school) and (b) Expected year of schooling (EYS) which is years that a 5-year- old child will spend in education over a life span.
The composite HDI would be a harmonic mean of all the 3 (All multiplied and then cube root taken).
‘What is your guess on India’s HDI rank globally?’ Well, of the one hundred and sixty-nine countries ranked by UNDP, India is at the bottom fifty countries of the world. Norway is ranked first and countries such as China, Sri Lanka, Indonesia and Malaysia are ranked higher than India. India’s index is only marginally higher than the satisfactory bench mark of 0.500.
What would be your inference from the above? That is to say, as explained previously also, is that the expansion of output though impressive by global standards is insufficient domestically to provide for basic human development in the country.
The population of US, the largest economy in the world, is even lesser than those below poverty line in India not to talk of the entire population. Then can we say, India’s population that being the second most populous country after China, which is largely responsible for the low HDI rank?
Well! the answer to that first is, if China can have a better rank with the highest population in the world why not India?
Secondly, traditional thinking has changed and today high population is seen more as an asset rather than liability in terms of potential markets, source for domestic demand and manpower. What is required is their proper harnessing through education, skill development and building human capital. It is in this direction India’s efforts have been modest to say optimistically.
Thirdly, one has to realize that curbing population is long protracted effort and has a number of economic and non-economic issues and could span several decades. One cannot wait for population to stabilize before launching developmental efforts or even worst wait for natural calamities to take their own toll.
Curbing population by many countries in the past is now showing adverseness like ageing workforce. India is blessed to have a favourable demographic dividend. India has over 50 per cent of its population under 25 years of age which cannot be said to be the same for any other country in the world today. And like said in the earlier paragraph the population requires only proper harnessing.
Finally, rather than looking at global comparison India should get focused on domestic priorities, needs of the social sector, human development and improving administrative governance at all levels. Look at the domestic requirements and then working to achieve the desired levels of output.
The HDI is a reflection of governmental efforts towards human development and the low rank of India should not be seen as a criticism of the government given the large size of the economy. It should serve as a wake-up call for the government to re-orient its strategies, properly align them aimed at basic human development. So that the people in general get the feeling of well-beingness with improved standards of living with growth of the economy and a vastly improved rank at the HDI.
It is wrongly perceived that outward orientation is only for exports or capital inflows or for the affluent. This orientation can as well be harnessed to fulfil domestic priorities. A significant role can be played by leveraging education, technology, scientific research, all possible by looking beyond domestic frontiers, outward looking for providing economic betterment for the people.
It is in this context our earlier section was titled as ‘External Sector—Looking Outwards’. And this section ‘The Global Economy and Outlook’, provides a perspective and outlines the broad overall contours of the world economy, extremely relevant, for economies like India, as it treads into a fairly uncertain, turbulent and volatile future.