INDIA SHOULD TARGET PER CAPITA, NOT AGGREGATE, GDP

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Context

• India should target per capita, not aggregate, GDP- Analyst.

Background

• In the early 1990s, China and India stood as promising economies, with comparable GDP figures and potential for growth.
• However, over the subsequent decades, China's economy experienced an unparalleled surge, propelling it to become a global economic powerhouse, while India faced challenges in matching its pace of growth.

China's Economic Transformation:

1990 vs. 2022:

• In 1990, China's per capita GDP lagged behind India's, and its overall GDP was only marginally higher.
• Over the next two decades, China witnessed exponential economic growth, averaging annual real GDP growth rates of 10% in the 1990s and 10.4% in the 2000s.
• By 2010, China emerged as the world's second-largest economy, boasting a nominal GDP of $6.1 trillion, a stark contrast to its 1990 figures.

China's Dominance:

• China's economic trajectory propelled it to unprecedented heights, surpassing even the United States in terms of nominal GDP in 2014.
• Despite a slight slowdown in growth rates in recent years, China's per capita GDP crossed $10,000 by 2019, reflecting its remarkable economic transformation.

India's Growth Trajectory:

Comparative Growth:

• India's growth story, while significant, has been overshadowed by China's meteoric rise.
• Real GDP growth rates in India averaged at 5.8% in the 1990s and 6.3% in the 2000s, significantly lower than China's.
• India's nominal GDP stood at $1.7 trillion in 2010, showing a modest increase from its 1990 levels.

Challenges Faced:

• India's growth rates have seen a decline in recent years, averaging at 5.9% during 2010-22 and 5.7% post-2014.
• While India's nominal GDP ranked fifth globally in 2022, achieving higher rankings has been hampered by relatively lower growth rates.

Focus on Per Capita GDP:

Importance of Per Capita GDP:

• For populous countries like India, per capita GDP holds significant importance, reflecting the general standard of living.
• While aggregate GDP adds to a country's geopolitical influence, per capita GDP is crucial for gauging the population's overall well-being.

Note: GDP per capita is the sum of gross value added by all resident producers in the economy plus any product taxes (less subsidies) not included in the valuation of output, divided by mid-year population.

Growth Potential:

• Sustained growth rates, even modest ones, can lead to substantial progress over time, as witnessed in India's transformation since 1990.
• China's exceptional growth story, with its per capita GDP surpassing India's significantly, highlights the importance of sustained economic development.

Factors Affecting GDP Per Capita Population Growth: Population growth significantly impacts GDP per capita, as it is the denominator in the calculation. High population growth can lower GDP per capita, especially if it outpaces economic growth. For instance, despite a high population figure, the United States maintains a high GDP per capita due to robust economic growth. Economic Geography: Geographic location influences productivity and trade links, impacting GDP per capita differently. Proximity to similar industries can enhance productivity through efficient resource utilization and reduced supply chain costs. Regional trade treaties, like those in the European Union or ASEAN, facilitate economic growth within the same geography. Transparency: Democracies and transparent judicial systems correlate with higher GDP per capita due to reduced corruption and lower business costs. Countries with transparent systems foster more citizen trust in their economies, promoting growth. Level of Education: Education levels of citizens affect GDP per capita, with countries boasting higher levels of postsecondary education experiencing higher per capita GDP. For instance, citizens with education beyond high school contributed significantly to GDP growth in countries like France, Norway, Switzerland, and the UK. Is Per Capita GDP a Useful Indicator? Per capita GDP serves as an indicator of a country's citizens' standard of living, assessing the impact of GDP on individuals. It provides a more accurate measure than GDP alone, reflecting the effectiveness of economic policies in distributing monetary gains. However, per capita GDP has limitations, including reliance on traditional GDP definitions that overlook technological advancements, automation, and climate change. These factors can affect employment levels and overall productivity, influencing per capita GDP. Additionally, non-inclusion of activities like entertainment and travel in GDP calculations and the inability to accurately measure income inequality are notable criticisms of per capita GDP.

Government Targets and Aspirations:

India's Development Goals:

• The Modi government has set ambitious targets for India's development, aiming for a "Viksit Bharat" or developed India by 2047.
• Achieving upper-middle-income status and eventually reaching high-income thresholds are essential milestones in India's development journey.

Path to Development:

• India's pursuit of higher per capita GDP and improved living standards aligns with global standards of development.
• While India's growth trajectory may not match China's, sustained efforts towards economic reforms and inclusive development are crucial for achieving its development aspirations.

PRACTICE QUESTION Q. Discuss the merits and demerits of India shifting its economic focus from aggregate GDP growth to per capita GDP growth as the primary measure of economic development. Assess the potential implications of such a transition on various sectors of the economy and the overall well-being of its citizens.