The 14-year living standards gap between India and China

The writer says the projected growth rate of 9.2 per cent, made by the Indian Finance Minister, will remain elusive unless the country takes up significant reforms.

Gautam Bhattacharya

Gautam Bhattacharya

The Statesman


representational image (iStock photo)

April 5, 2022

NEW DELHI – The International Monetary Fund (IMF) in their latest release on the subject reveals that the average income of an Indian (per capita GDP) was $7,333 in 2021 and the country ranked 128th in the world in terms of average standard of living of people. This estimate is not based on the exchange value of the US dollar vis-à-vis Indian rupee but relied upon Purchasing Power Parity (PPP) which is accepted worldwide as one of the methods for comparing the standard of living across countries having different currencies and different price levels.

If a basket of goods cost $10 in the US and the same basket costs Rs 210 in India, then in terms of purchasing power, one dollar in the US is the same as Rs. 21 in India. Thus, value of one dollar in India is Rs 21, though at the official exchange rate it may be Rs 77. With Rs 77 we may buy in India goods and services worth that would cost $3.67 in the US.

If we go by this estimate, the average income of an Indian in a month comes to about Rs.12,833. Income of a nation is, however, never uniformly distributed. The bottom 10 per cent of population in India earns only about 3.5 per cent of the total income. As a result, there is poverty and hunger.

According to the estimates of the UN (2019), 28 per cent of the Indian population is under poverty. A person is under poverty if his income is less than $2 a day in urban India and less than $1.7 in rural India. If the average Indian family size is taken as five, then close to 40 crore Indians have family earnings that are less than Rs 5,080 a month in rural India or less than Rs 6,430 a month in urban India.

However, income inequality is a universal phenomenon and normally it increases with economic growth. India is no exception. Income of lowest 10 per cent of the population is 3.56 per cent of GDP in China, 2.29 per cent in Russia, 1.7 per cent in USA, 0.98 per cent in Brazil and 0.94 per cent in South Africa (World Bank, 2011).

The IMF estimates also show that in terms of overall GDP (PPP), the Indian economy ranks third in the world ($10.18 trillion), whereas China ranks first ($26.66 trillion) and the US ranks second ($22.68 trillion). Thus, in real terms the Chinese economy appears to be 2.62 times bigger than that of India and average income per person in China ($18,931) is 2.58 times that of India. If the Indian economy grows at the rate 8.2 per cent per annum, presuming population growth is 1.2 per cent in a year, it will take 14 years for an average Indian to reach the present standard of living of an average Chinese.

By the same logic, it will take 21 years for an average Indian to reach the present average living standard of a Russian ($29,485). Economic growth, however, does not follow simple mathematical models. Sustained development at the rate of say 8 per cent plus for a decade and half or two is not an easy task. Not easy, but not impossible either. China did it. But it is a bit unfair to compare the growth potential of a democratic nation of diverse people with that of China under a monolithic regime. Yet, such comparisons are bound to arise as both India and China started their journeys almost in similar backgrounds, about seven decades back.

Where exactly did we lag by 14 years? It’s well known today that the unprecedented growth of China for about two and half decades since the 1990s, led to the present difference of 14 years. Though not as good as China, the Indian economy also had an impressive growth for about 15 years since the beginning of this century. But thereafter it slowed down. One important reason for this slowing down is the decline in the rate of domestic capital formation from 35.4 per cent of GDP in 2011 to 28.42 per cent in 2020. In China, this rate is around 43 per cent.

The downward trend in the rate of capital formation is indicative of decline in the rate of capacity building, lack of investment in capital goods. What made the rate of the domestic capital formation in India decelerate? The crux of the problem lies in relatively lesser investmentspending by the Union government and by the States in infrastructure projects. For about a decade or so, there has been a significant shift in the policy of the government to spend a higher percentage of outlay in direct transfer of benefits to the accounts of people of vulnerable sections under various social welfare schemes.

Whereas these welfare schemes provided much needed relief to the poorer people and stimulated demand of consumption of essential goods, in the long run the economy is bound to slow down if there is decline in the rate of capacity building. Without undermining the importance of welfare schemes, it is important that economic reforms are simultaneously carried out to stimulate the private sector to invest in capacity building and compensate for the relative decline in the government spending on infrastructure projects. Are we doing that?

After the end of the License Raj for industrial production and reduction of trade barriers in the 1990s, our second-generation economic reforms were expected to bring private sector investment in infrastructure projects viz. power, ports, highways, airports, railways etc. But that dream has never been fulfilled. India’s aspirations to make the country a manufacturing hub of the world has not materialized. Contribution of the manufacturing sector continues to be as low as 17 per cent of GDP.

The infrastructure projects and the manufacturing units are important because they have the potential to engage millions of semi-skilled workers, who are presently engaged in the agricultural sector in the shape of ‘disguised unemployment’. Political consensus has not developed yet on the issues relating to land acquisition and labour laws. Resistance of different groups against land acquisition for open cast coal mine at Deucha-Panchami near Sainthia in Bengal is indicative of the fact that we have not moved an inch from the days of the Singur agitation when it comes to the issue of land acquisition.

Various stakeholders are still opposed to the new labour laws. The year-long agitation against three acts on market reforms of agricultural products and subsequent repeal of those acts by Parliament are indicative of our failure to develop national consensus in matters of crucial reforms, essential to attract private investment and stimulate economic growth. No effort seems to have been initiated towards reforms that are warranted at the level of the States.

In very few States are Kisan Mandis physically accessible to the farmers. In these States farmers are not in a position to sell food crops at the minimum support price (MSP) and higher the MSP, higher is the profit of middlemen. Capacity of cold-storages, availability of refrigerated vehicles for transportation of perishable agricultural products and access to certified seeds are inadequate. Unless there is public or private investment in these domains, ambition to double real income of farmers in a period of five years will be hard to realize.

Despite some efforts by states, infrastructure for vocational education to enhance the skill-base of the workforce is grossly inadequate. Inflow of private capital in the sphere of skillbased training is insignificant. Municipalities in the country are struggling with an acute financial crisis. India has not seriously addressed how it can attract private investment in the creation of urban housing for lower middle class and poor, for development of slum areas and for improvement of urban transport network.

No blueprint has been developed to incentivize development of infrastructure necessary for use of Electrical Vehicles. How municipalities can enhance their revenue-base by providing high quality piped drinking water to households, how corporates could be attracted for maintenance of city roads and street lighting or for beautification of water bodies and parks have not been explored yet.

Unless we develop political consensus in attracting private investment in infrastructure projects; unless we have a national consensus on land acquisition and labour laws; unless we break the market bottlenecks associated with the sale of agricultural products and unless we succeed in making State governments partners in economic reforms, India emerging as a strong economic power will remain a distant dream and the projection of a growth rate of 9.2 per cent made by the Finance Minister will remain elusive.

(The writer is a former civil servant who retired in the grade of Additional Secretary to the Government of India)

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