Measuring progress: Factors that can accelerate GDP growth

Per capita income inaccurately reflects country’s growth, as seen in India’s lower middle-income status despite its growth trajectory.

India, with a per capita income of $2,411, would be classified as a low middle-income country (LMIC). Interestingly, World Bank data shows that the per capita income for Bangladesh was $2,688. Sri Lanka, which is a very fragile economy and was on the verge of bankruptcy a couple of years ago, has a per capita income of $3,354. Something looks out of place, considering that in the past three years India has been the best performing economy in the world with growth rates upwards of 7%, while the rest of the economies had to face sharp challenges in terms of growth. Yet, there is s sharp difference once the GDP numbers are normalised by population.

The simple reason why India does very well when it comes to headline growth, which also results in high GDP numbers, is that there has been overall development across sectors. Services and manufacturing have grown at consistently steady rates, with greater formalisation leading to good overall performance. But the country scores low in terms of per capita indicators due to a very high population of 1.4 billion. This is the reason why even smaller countries like Bangladesh and Sri Lanka score better in relative terms.

Per capita income, in a way, is a measure of average productivity in the economy, which has tended to be low. While population growth has come down well below 1% per annum, there is also a need for accelerated growth of GDP while controlling the population. This is why China, which has around the same population, does much better regarding per capita. However, this has been done over a period of over three decades, with a big push being given by the government on capex. Similar is the case with countries like Argentina and Turkey, where a lower size of population allows the benefit of higher per capita income.

It is against this backdrop that one must look at the targets for a GDP of $5 trillion, $7 trillion, or $10 trillion being relevant. The size of the cake must increase so that with modest growth in population, the per capita income can also increase to higher levels. This is also why having an objective of reaching the status of an upper middle-income country is relevant. There are two issues here—increasing the size of the cake, and improving the quality or productivity of the population so that the former is achieved at an accelerated pace.

India has demonstrated that a nominal growth rate of more than 10% is achievable with real growth of 7% per annum. Assuming that India clocks 11% growth in the next few years, and population growth remains where it is today, we can reach the threshold of $4,095 per capita in the next five years (including FY24). At a conservative level, it can be six years, assuming that there can be slips along the way due to an unfavourable monsoon. If this momentum is maintained for the next 15 years, India can hit the magic number of $12,965 as per capita income, which will make us reach the league of high-income nations. Again, an allowance of another year can be made for any slippages and the fact that the World Bank’s definition will also adjust to the inflation developments during this period.

Therefore, in the next two decades, which will be up to roughly 2045, with the present momentum being maintained, India can reach the status of a high-income nation. This leads to the second question on the quality of population. While we do talk a lot about demographic dividend, the present matrix does not ensure that the youth are well-educated and are in a position to get jobs which require an acceptable level of skillsets. While there has been a jump in employment in the last few years, it has tended to be concentrated in the construction, retail and delivery industries, which require limited skillsets. There is clearly a need to move over to higher skilled jobs, which will evolve as this pace of growth is maintained.

It must also be remembered that with the widespread use of technology in most industries, there is also a case of labour being replaced. CMIE data shows that for the age group of 15 years and above, there are around 439 million people, of which only 14% are graduates. A graduate degree is not sufficient to get a well-paying job in the private sector. Further, the labour participation rate is around 61% for graduates and 40% for all education groups. Clearly, education is the main challenge for the nation going forward. 

Therefore, there are a few elements that have to fall in place. First, the average product of the population has to increase, and this is where education and skills matter. Second, jobs have to be created at an accelerated pace in sectors which require these skills. These two factors will also help to bring in accelerated GDP growth. The comforting factor is that with the present standard and quality of labour force, the country has done well enough to clock such high GDP growth rates on a sustainable basis. The fulfillment of these two objectives will help add a delta to the growth rate.

Madan Sabnavis, Chief Economist, Bank of Baroda penned this piece for Financial Express.

Views are personal and do not represent the stand of this publication.