India: 5th largest Economy

In News

• Recently, India surpassed the UK to become the world’s fifth biggest economy.

Key Highlights

• Leaving behind UK:
  • India leaped past the UK in the final three months of 2021 to become the fifth-biggest economy. 
  • The calculation is based in US dollars, and India extended its lead in the first quarter, according to GDP figures from the International Monetary Fund. 
• India versus UK:
  • On an adjusted basis and using the dollar exchange rate on the last day of the relevant quarter, the size of the Indian economy in nominal cash terms in the quarter through March was $854.7 billion. 
  • On the same basis, the UK was $816 billion.
  • Sterling has also underperformed the dollar relative to the rupee, with the pound falling 8% against the Indian currency this year.
• Impact on UK:
  • The UK’s decline down the international rankings is an unwelcome backdrop for the new prime minister. 
  • The nation is facing the fastest inflation in four decades and rising risks of a recession that the Bank of England says may last well into 2024.
• India’s Progress: 
  • The Indian economy is forecast to grow more than 7% this year. 
  • A rebound in Indian stocks this quarter has just seen their weighting rise to the second spot in the MSCI Emerging Markets Index, trailing only China’s.
• IMF’s Forecast:
  • It shows India overtaking the UK in dollar terms on an annual basis this year, putting the Asian powerhouse behind just the US, China, Japan and Germany. 
  • A decade ago, India ranked 11th among the largest economies, while the UK was 5th.

Comparison & Challenges

• Population size:
  • This is one of the most fundamental differences between the two countries. 
  • As of 2022, India has a population of 1.41 billion while the UK’s population is 68.5 million. 
  • In other words, India’s population is 20 times that of the UK’s. 
  • This gap is unlikely to be bridged in a hurry.
• GDP per capita:
  • Since there is such a stark difference between the population of the two countries, GDP per capita provides a more realistic comparison of income levels because it divides a country’s GDP by the population of that country. 
  • Unsurprisingly, the income of an average Indian is far lower.
• Poverty levels:
  • Low per capita incomes often point to high levels of poverty. 
  • It is noteworthy that at the start of the 19th century, the UK’s share in extreme poverty was considerably higher than India’s. 
  • However, as things stand today, the relative positions have reversed even though India has made giant strides in curbing poverty.
• Human Development Index:
  • The Human Development Index is a composite of health, education and standard of living parameters. 
  • There is a contrast between India standing on HDI with the UK’s. 
  • Despite its secular improvement, India might still take a decade to be where the UK was in 1980.
• Universal Healthcare Coverage (UHC):
  • The UHC Index is measured on a scale from 0 (worst) to 100 (best) based on the average coverage of essential services including reproductive, maternal, newborn and child health, infectious diseases, non-communicable diseases and service capacity and access.
  • While faster economic growth and the government’s policy focus on healthcare schemes since 2005 have made a distinct improvement for India, there is still a long way to go.

Way Ahead

• Increasing Expenditure: There is a need to increase the size of government expenditure relative to GDP for which augmenting the combined tax-GDP ratio is a prerequisite. Further, there should be an increase in the share of combined expenditure on education to 6% of GDP and on health to 3% by the mid-2030s, rising subsequently to about 5%.
• Balanced Fiscal Policy: The fiscal policy should also ensure a balance on the combined government revenue accounts and utilization of the entire capital receipts, including fiscal deficit for capital expenditure.
• Technological Growth: Investment in education and technological skills would accelerate adoption of global technologies in India, thereby augmenting the contribution of technological progress to growth.
• Female workforce participation: As per International Labour Organization (ILO) data, India’s female labor force participation rate has been declining in recent years. The ILO has estimated this rate to be as low as 18.6% in 2020. Emphasis on female education and health may help tangibly increase their participation in productive activities.
• Higher savings and investment: A virtuous cycle of higher per capita income, lower dependency ratio, and higher female earnings in the family may facilitate higher savings and investment, and thereby growth.
• Increasing Employment Intensity: Overall, employment intensity of output needs to be increased. To some extent, this would be facilitated by the relatively higher growth of the services sector, which tends to be more employment intensive.

Source: IE