India needs to really engage itself with the per capita challenge
The IMF World Economic Outlook which was presented this month has some major takeaways for all the economies. But three things really stand out from the perspective of India. Firstly, there is the comparison with China. Secondly, there is the uncertainty over supply chains. Finally, there is the real story of per capita incomes, which India needs to immediately engage with.
India versus China; oh really!
For the last three years, India prided at growing faster than China. Even when China was showing signs of slackening, Indian economy continued to grow at a frenetic pace. The COVIC-19 pandemic has just changed that equation. India, which was almost the fastest growing large economy till 2018, may end up with the biggest contraction in FY21. IMF projects Indian GDP to contract by – 10.5% in FY21, something that is in sync with what rating agencies too say.
But the bigger concern is that the story may be reversing in China. According to the IMF estimates, in the calendar year 2020, China may end up with positive growth of +1.5%, perhaps the only large economy to show positive growth. The year 2020 alone will ensure that the growth advantage that India had built up over China in the last five years would be completely neutralized. IMF believes that while China could trigger a rapid recovery, it could be a lot slower and labored in the Indian context.
Long road to $5 trillion
Till the pandemic broke out, the big debate in India was when the Indian GDP will scale $5 trillion. With a GDP of $3 trillion in 2019, it was clear that it would take just 5 years of 7.5% growth to reach the magic figure. Not any longer! After the contraction in GDP in FY21, it would be almost FY23 by the time India gets back to the FY20 levels of GDP. That is assuming that demand picks up in a big way, companies invest aggressively and supply chain issues are taken care of. None of that can be taken as a fool-proof assumption. In short, the focus of the Indian economy has all of a sudden shifted from a growth engine to a sustenance engine.
The Bangladesh story
What captured Twitter was Bangladesh overtaking India in terms of GDP per capita. That was always happening, but now IMF has confirmed that Bangladesh would not only overtake India but also sustain the gap over India. In the last twenty years, Bangladesh has not only shown a smart approach when it comes to attracting investments but also when it comes to investing in health and education. Today, Bangladesh ranks above India on most social growth parameters and that is now translating into higher GDP per capita. Remember, Bangladesh is a very densely populated nation and this is the challenge India should immediately engage with!
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