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Last Updated: Monday, 3 July 2006, 09:51 GMT 10:51 UK
India's economic report card

By Kaushik Basu
Professor of economics, Cornell University

India villagers
India's per capita income is a tad higher than sub-Saharan Africa's
For non-economists the World Development Indicators (WDI), published annually by the World Bank, must seem like a cure for insomnia. It is long, is written on large-format paper, crammed with numbers and consists of very few words.

But, as an economist, I find the WDI to be a very valuable source book.

The paucity of words means I need have no fear of being burdened with somebody's expert opinion (and can merely inflict mine on you). While impressionistic writings and generalisations have their role, and pure statistics has its own risks, the latter often helps us cut through popular hype to see economic reality as it is.

The recently released WDI 2006 is a wonderful document for evaluating cross-country performance. This column's focus being what it is, let us begin with South Asia.

Sobering

Given the huge positive press that India has received in recent times, it is sobering to discover that India's per capita income is just a shade higher than that of sub-Saharan Africa, and about one-sixth that of Latin America.

Equally surprising is that 35% of India's population lives on less than $1 a day, which is comparable to Bangladesh's 36% and much worse than Pakistan's 17% and Sri Lanka's 6%.

The problem with South Asia is that, being poor, even this smaller inequality means much greater hardship for the poor and this is what is feeding various kinds of rebellious movements in the region

What then is the basis of optimism for India?

It has everything to do with change.

To check this out statistically I pulled out WDI 1998 from my shelf. This gives data for mainly 1996 and so is unaffected by the East Asian crisis which started in 1997.

In 1996, India had a per capita income of $380, Pakistan $480, Bangladesh $260 and Sri Lanka $740.

Compare these with the figures in the latest WDI (which pertain to 2004).

India's per capita income has risen to $620 and has overtaken Pakistan's $600; and the relative gap with Sri Lanka, which now has a per capita income of $1010, has narrowed. Bangladesh which currently has a per capita income of $440 has grown reasonably well and so has lost out with India more marginally.

Exaggeration

How does India's growth compare with the world beyond South Asia?

A woman scrounging on a rubbish dump near Dhaka, Bangladesh
A lot still needs to be done to combat poverty in Bangladesh
The recent cover story on the Indian economy in Time magazine repeats what is common wisdom, to wit, that over the last three years India has achieved "the second fastest [growth] rate in the world".

The WDI allows us to check the veracity of this statistically. And this common wisdom turns out to be an exaggeration.

If we take the national income growth rate over the period 2000-04, with an annual growth rate of 6.2% India was not second but the 17th fastest-growing nation in the world.

If we take a longer period, 1990 to 2004, India moves up to being the fourth fastest-growing economy in the world, behind China, Vietnam and Mozambique.

And if we take an even longer view - from 1980 to now, India does indeed come second, behind China and virtually tying with Vietnam.

So what India has excelled in is sustained growth. It is this that has given rise to hope. And, combined with the vibrancy of democracy and the successes of higher education in India, this has led some commentators to argue that its future augurs even better than China's.

Inequality

One worrying feature that could cause political instability and jeopardise this bullish forecast - and much of South Asia shares this anxiety - is the problem of poverty and inequality.

Much has been written about this but again some statistical fact checking sheds new light.

Inequality in South Asia is large but not as large as in much of the rest of the world.

Homeless people in Karachi
Even smaller inequality means much greater hardship for the poor in South Asia
Let us consider the ratio of income earned by a country's richest 10% and the poorest 10%. The ratio for India is 7.3. That is, the richest 10% of the population is a little over seven times as rich as the poorest 10%.

All South Asian nations have similar ratios.

This is a lot of inequality but not as much as in China which has a ratio of 18.4 or the United States 15.7.

The problem with South Asia is that, being poor, even this smaller inequality means much greater hardship for the poor and this is what is feeding various kinds of rebellious movements in the region.

This will be one of the most formidable challenges confronting India over the next decade if it is to live up to its promise.

The difficulty arises from the fact that the rising inequality is largely a concomitant of globalisation and, hence, for a single country to take action against this is to take the risk of a pathological backlash on the economy.

To try to cap high-end income, as some have naively suggested, will cause the flight of skilled citizenry and capital to other nations and will exacerbate poverty.

To wantonly subsidise the poor or to dole out largesse will cause fiscal bankruptcy, which will make the problem worse in the long run.

The focus will have to be on creating private-sector jobs with the complementary use of a few well-directed subsidies.

This is not a matter of sloganeering and populist pronouncements but will require a combination of scientifically designed policy interventions that reach out to the poor without damaging market incentives and the entrepreneurial spirit.

This debate is now closed. Here are a selection of your views.


India is very unique country in the sense that the top 10% and the bottom 10% of India each include a population of over 100 million. Of course, the ratio of income of the top 10% to the bottom 10% is very small. To see the inequality, try using the ratio of the income of top 1% to the bottom 1%. I assume India will be among the worst. There are no minimum wage laws in India; the tea plant workers, recently had to go on a strike and still their wages are well below a dollar a day.
Ajay, USA

Interesting that India's comparative growth record looks best over the longer term - that is, when including much of the long period when it was practising protectionist, socialistic policies of the kind "free-market" ideologues like Basu deplore. Of course, "globalisation" is just these ideologues' cant word, intended to make the worldwide and highly successful class war the very rich have been waging on the rest of us for the past quarter century look like a natural phenomenon. What we need is a global, democratic response to this class war, to prevent the rich playing off the poor in different countries against each other in the way Basu depicts as inevitable.
Nick Gotts, Scotland

If India was 2nd fastest growing economy between 1980-2004, 4th fastest between 1990-2004, and 17th fastest between 2000-today, doesn't it mean that growth (relative to the rest of the world) is slowing? Could it be that the "market reforms" have slowed down the economy and not sped it up? I guess we will know in another decade or so after this outsourcing hoopla has died down and may be the world economy goes through a downturn. Then people will realize that the social (education) and infrastructure (dams, industries) spending after independence was the cause of the high growth (relative to the world) during the 80s and 90s. And that the "reforms" reduced social spending (human capital investment) and hence led to the decline in growth rates. The last decade's growth rates around the world are masking this statistic.
Ashish K, USA

It was very surprising to know that the disparity between the richest 10% and the poorest 10% is much lower in India than countries like USA and China. This is quite anti intuitive. The general perception in India is that the few really rich Indians are infinitey richer compared to the average. This statistic shows that on a sociological level there is more economic justice in relative terms, though on an absolute scale, the bottom is still way below poverty line. It will however be very interesting to know the comaparative results if we broaded the dataset a bit, say from 10% to 20% or 30%. And also to compare the middle classes together as it is in this region that I beleive India has gained a lot of ground in the last decade alone.
Indranil Mustafee, United Kingdom ( India )

Mr Basu's comments will hopefully be an eye opener to the all the BBC readers. India's recent growth has been at best chaotic with extraordinary emphasis on the service sector. Orderly infrastructure development and agricultural growth will be the key to sustained growth. India also needs high level of expertise in all sectors to make these newfound facilities work.
P Srinivasan, UK

India resides in its village's. Around 65% of the population lives in rural India. I come from one of those village. These villages are hardly untouched by so called growth and modernisation. The fourth generation of the families in my village still are same as their forefathers. None of government reforms or reports have ever made difference! And nor will they make any in future. Its upon educated people like us who can be catalyst in changing their tomorrow. Even if its one step at time. I am in process of taking that step. How about you?
Rajshree Jadeja, USA

The article misses the main point. It compares the per capita incomes of different countries in terms of US $.It ignores the basic fact that US $ has widely varying purchasing capacities for essential items in different countries and this makes all the difference in comparing relative living standards.
S.R.S.Sastri, India

From the article it seems that as of 2004 India's per capita was $620 and Pakistan's $600. The article also says that all South Asian nations have similar 'inequality' ratios. Yet in India 35% of people live on less than $1 a day and in Pakistan it is half that number or 17%. Both India and Pakistan officially claim that poverty levels are around 25%. As of 2005-2006 Pakistan has claimed to have increased its per capita to around $840 while India seems to be stuck at around $740 despite both having similar growth rates. Do we really trust such statistics?
Sourav Dasgupta, USA

(I'm not an economist - I'm a computer programmer working with some of India's growing service sector and take an interest in the issues of globalisation) You argue that increasing wealth disparity in nations where the poorest live in absolute poverty is a more politically destabilising issue than in nations where the wealth gap is larger but the poor not so poor (although your examples include China where the poorest are as absolutely poor as India's poor, however as China is not a democracy it may quash unrest in a way that would not be acceptable in India). This needs further explanation. What are the forces within Indian politics that represent the poorest and how destabilising are they? Also, While the wealth gap between the top and bottom has widened how has the bottom moved in relation to absolute poverty (you say 35% now but what was the figure in 1998?). I have read arguments that say that even if the top is getting richer faster than the bottom, that the bottom is ! getting wealthier at all is a good thing, reducing absolute poverty. How is that destabilising?
Steve Pavett, UK

While it is true that the Indian economy is booming thanks to the service sector, gross inequalities still persist as pointed in the report. What India now needs to do is focus on the manufacturing sector. Remember, IT and BPO, high technology etc can provide jobs only to the educated elite. The vast majority are blue-collar workers. Only if they are able to get jobs in industries will poverty decrease. That is where China has succeeded and we need to emulate that. In China if a migrant goes to the cities, he ends up in a factory with a job while in India if a migrant goes to the cities, he ends up as an unemployed in the slums!
Arun Kumar, India

As Basu points out, India needs to create more jobs in private sectors. But the focus also needs to be in increasing agricultural productivity than just high-tech industry. India also needs to address issues such as reservation which is a big hindrance to growth. Free, quality education to all will take the economy to great heights, as it is very fundamental to growth. We all Indians have a part to play in this and we can make this happen collectively.
Giri Gopalan, India

The decelerating growth in household savings rate in india (1970-2000),thanks to the conspicous consumption by post independence younger generation is resulting economic and socio-cultural pressures (be it high profile drug abuse, juvenile diabetes, rebellious movements: Naxalite, aoists).India needs a benevolent dictator Singapore or a presidential form of govt.
mouli, india

Just returned from India. I concur with Professor Basu's observations. I wish that he had been more open about India's perennial evils perpetrated by its politicians, businessmen, and even independent professionals such as physicians, auditors, lawyers etc, not fully disclosing their incomes and remitting income taxes, widespread stealing of electrical power, flaunting zoning regulations, encroaching on public lands and rampant corruption in dealing with public and elected officials. Until, the state and central governments address these issues, I see little hope for India to progress faster.
Alex, USA

India's biggest challenge comes from infrastructural problems. Also, at some point, the government has to stop and think about various social safety nets. Three years ago when I went back home, the kids on the streets were making money by wiping car windows, two yrs ago - by selling hand-made jute ropes & peanuts and last year they were selling the World is Flat by Friedman and the Financial Times!
Monika Kochhar, New York, USA

I think the problem in India is size... India is not the same story as it was 20-30 years before. I think things are moving in right direction .. but in a very slow way. Rreal investment needs to make in agriculture and irrigation. Land reforms needs to be implemented throughout India
Alok, Gibraltar

I dont know why the World Bank comes up with such reports or statistics every two days. I mean all the stats presented here is well known (although I am a little confused with 35% figure below poverty line as according the gov. its 26%). Anyway, this report and as such this article adds little new information and reiterates the same old broken record. And btw, why is BBC so obsessed with telling us how poor we are with an article every couple of days. I know we are, I can see it daily.
dipesh, India

Indian fiscal system has to be revised and tax collection should be made more efficent.I have been to India and seen it first hand ,there is lot of black market and corruption.Business people normally deal in hard cash there is no record keeping in small businesses.they are escaping from the paying tax. and also it is very difficult to start a Comapny in India.You have to go through different channell and time consuming and burocratic.In Uk you can form a Company in 8 Hours.In India it take more than 3 months.
vasan, United Kingdom

The great thing about India is that there is hope and so long as corruption and political influence can be rooted out, India will do well.
Shovan Das, USA

Do you think that India will sustain this GROWTH RATE in this decade?
VIKI SHAH , INDIA

Well this article is clearly written by a non-economist, as most economists would know that they would never trust figures published by the world bank. The figures are made that way to give out more loans to poor countries. A friend of mine used to work for the World Bank, but he has learnt the truth about these figures. Which is purposely lowered so that they can dish out more debt to already debt stricken nations.
Ananth, UK

India has made remarkable progress from 1947 when Indians on the whole were the poorest of the poor. The dire poverty prevailing then is not seen in most of India today. Caste, and communalism is still a major problem but these are abating with the rise of urbanisation.
amrat jivan, Canada

It is one thing to piggy back on the IT sector and another thing to bring in innovation in the policy sector. Considering that majority of Indain population is rural and agriculture is the main occupation it is urgent that the rural infrastructure needs development and this will lead to better access to markets and reduction in the transport costs both of will contribute to the growth in the rural sector. Some how there seems to be too many vested interests whihc are patting on Indias back whihc seems to be leading to a situation of "Emperor has no clothes".
SV Nagappa, Australia

Very true Mr Basu. Indians have been living on hype. Call centers do not a superpower make... We need more people like you and Amartya Sen to shed light on true issues. Peace
Ravi, USA (Originally India)

India for its population does not have a lot of natural resources. India must rely on technology to drive its future growth and emulate Japan. The wealth of sub-Saharan Africa is mostly from natural resouces, the same is true for the oil rich middle east. India which gave the world the decimal system and Algebra must use its brain power as its engine of growth.
V Narayan, Sweden

That was an eye opener. Especially the ratio of income of rich and poor. Surprisingly we are way above US and China atleast in that category.
Prasanna, India




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