Data | The problems with the Prime Minister’s economic claims

Official rhetoric on India becoming a $5 trillion dollar economy has resumed, with the Prime Minister’s remarks at the BRICS conference last week. However, these claims are riddled with problems.

Official rhetoric on India becoming a $5 trillion dollar economy has resumed, with the Prime Minister’s remarks at the BRICS conference last week. However, these claims are riddled with problems.
| Photo Credit: Reuters

Addressing the BRICS Business Forum Leaders’ Dialogue at Johannesburg last week, Prime Minister Narendra Modi said, “Soon, India will become a $5 trillion economy.” In 2018, a working group under the Ministry of Commerce and Industry set 2025 as a deadline for achieving the same. The economic slowdown induced by the COVID-19 pandemic has upended the target deadline.

With the revival of the economy now, and the general elections on the horizon, official rhetoric on this count has resumed. While addressing the nation on the 77th Independence Day from the Red Fort, Mr. Modi noted that India was the world’s 10th largest economy in 2014, but now stands at fifth spot. He has also invoked a “third term” in office saying that India would be among the world’s top three economies by then.

Even if one ignores the political hubris and sidesteps the serious debate over the methodological rigour of India’s GDP estimates, the problems with the Prime Minister’s economic claims are manifold.

First, Mr. Modi is using nominal Gross Domestic Product (GDP) estimates to make claims about the size of the Indian economy relative to other national economies. This is wrong. Nominal GDP gives an estimate of the national output for a year at the prices prevailing in that year. However, the actual size of the economy is reflected in real GDP, which is adjusted for price changes. In other words, India can become a $5 trillion economy in nominal terms through high inflation, even without any significant changes in the economy’s output. It is for this reason that national governments, the United Nations, and other international agencies such as the World Bank and International Monetary Fund base their economic growth estimates on real GDP (price adjusted) and not nominal GDP (estimated at current market prices).

Second, international comparisons between national GDP estimates get further complicated because of exchange rate conversions. Researchers have long held that market-based exchange rates are not the appropriate way in which national GDPs can be converted into a common currency for comparison because of the existence of a substantial share of non-tradable commodities in national outputs as well as the innate volatility in market-determined exchange rates.

Going by nominal GDP, the Indian economy, valued at $3.39 trillion in 2022, ranked fifth in the world, as Mr. Modi said. However, in terms of real GDP, India’s economy in 2022 was $3 trillion and ranked sixth in the world. PPP-based GDP estimates (in terms of purchasing power parities estimated through price surveys of a common basket of commodities across countries) show that the Indian economy’s size was over $10 trillion in 2022. India’s PPP-based GDP has consistently expanded since the 1990s. India surpassed Germany in 2005 to become the fourth largest economy in the world and Japan in 2009 to become the third largest, a rank that has remained unchanged till date. 

Table 1 | The table shows the rankings for the 10 largest economies in the world in terms of PPP-based GDP, real GDP, and nominal GDP in 2022.

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The third problem with Mr. Modi’s narrative regarding the size of India’s economy attaining new heights under his regime relates to its socioeconomic implications. Studies in economic development start with the premise that per capita income and output are the key indicators of a country’s standard of living, not the total size of the economy. Having surpassed China as the most populous country in the world, India’s per capita income (Gross National Income or GNI) and GDP continue to remain the lowest among all the countries in G-20, as depicted in Table 2

Table 2 | The table shows per capita income and GDP per capita for G20 countries.

This means that India is the poorest country in the G20 by per capita income. This is not to deny the importance of economic growth in advancing economic development but to underline the fact that being the most populous country in the world today, India needs to become not just the third largest but the largest economy in the world before it can claim to have attained a dignified living standard for the majority of its people. With almost equal populations in 2021, China’s per capita income (at 2017 prices) was PPP $17,504 while India’s was PPP $6,590; Brazil’s per capita GNI was PPP $14,370 and South Africa’s PPP $12,948.

Chart 3 | The chart shows the pre-tax national income by income groups in BRICS in 2021.

India’s low per capita income is further compounded by the skewed distribution of that income: 21.7% of its pre-tax national income went to the top 1% of the population in 2021 while only 13% went to the bottom 50% of the population (Chart 3). While in Brazil (9.1%) and South Africa (5.8%) the share of national income for the bottom 50% was even lower than India, China (13.7%) and Russia (15.7%) had higher income shares. This unfair reality of the top 1% cornering a disproportionate share of the national income in emerging economies gets concealed by official rhetoric on trillion-dollar GDPs and their growth.

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If India aspires to catch up with China or the U.S. in terms of GDP and per capita income, it needs to move beyond rhetoric and augment resource mobilisation and real investments in physical and human capital to levels much higher than what has been achieved till date.

Prasenjit Bose is an economist and activist. Samiran Sengupta and Soumyadeep Biswas are data analysts at CPERD Pvt Ltd, Kolkata

Source: World Development Indicators Databank, the Huma Development Report 2021-22, and World Inequality Database

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