Updated: May 26
Junior Research Analyst,
Recently, the International Monetary Fund (IMF) projected that India’s per capita GDP (in nominal US dollar terms) will be lower than that of Bangladesh. India’s per capita GDP is projected to be $1,876.53 in 2020, while it is expected to be $1,887.97 for Bangladesh. As expected, it led to political slugfests in India where the opposition party members did not forego the opportunity to target the government over mishandling the economy. It is best left to the politicians to deal with the politics over economics. Without downplaying the economic progress that Bangladesh has achieved, it is imperative to look at this development from two viewpoints i.e., the accuracy of comparing per-capita GDP in nominal US dollar terms and implementation of economic reforms by Bangladesh and India.
A basic understanding of economics makes it clear that it is problematic to gauge economic development and growth in nominal terms. The estimation largely fails to factor the level of inflation in the economy and the change in exchange rates. For example, if a country produces 100 units of products and sells them for Rs. 100 at Rs.1/unit in 2019, the nominal value of GDP is said to be Rs. 100. If the country produces 100 units in 2020 but sells them at Rs. 1.2/unit, the GDP would increase to Rs. 120. Here, even if there is no increase in production, we see that the GDP has increased. This is due to the inflation which is prevalent in the economy. Similarly, when we talk about the GDP level in nominal US dollar terms, it is dependent on the exchange rate of the currency of the concerned country (India and Bangladesh in the present case) and US dollar. The country can achieve a higher level of GDP in US dollar terms by devaluing the currency ceteris paribus. This is the precise reason as to why economists do not find it challenging for India to achieve a $5 trillion economy since the government reportedly claims to achieve it in nominal terms.
It would be accurate and prudent to compare the two economies based on other factors and estimates such as the Purchasing Power Parity (PPP), Human Development Index (HDI), the balance of payments (BoP) inter alia. India’s per capita GDP in PPP terms for 2020 is estimated at $6,284, compared with $5,139 per capita GDP (PPP) of Bangladesh for the same period. If we were to consider the HDI rank, India stands slightly higher at 129, while Bangladesh is ranked 135. Regardless of the difference being small, it is to be noted that these estimates provide us a much more accurate picture of the economy for the purpose of comparison.
While India’s GDP in terms of purchasing power parity (PPP) is expected to be 22.28% higher than Bangladesh, it seems irrelevant to predict a higher economic growth for Bangladesh. Arguing the validity of IMF’s recent estimation on India’s per capita GDP, Indian economists have emphasized on several indicators that should be included in order to compare the overall economic growth. India’s welfare schemes to provide financial support to workers and businesses during the coronavirus pandemic has proven to be an effective solution adopted by Modi government. Whereas a recent study by the Bangladesh Institute of Development Studies has projected that around 164 million have joined as new poor in the country, with minimal support from the government. A major decline in production activities has also affected the textile industry of Bangladesh, which primarily accounts for 90% of the country’s exports, therefore, increasing the level of unemployment. Even though the IMF’s prediction has been held on the basis of per capita GDP, its accuracy can be doubted as other major economic barriers still exist in Bangladesh.
The primary concept of projecting a country’s economic growth on the basis of a single parameter seems to be an old view. It no longer estimates the exact amount of growth and serves as a misleading piece of information. Moreover, it has been used by leaders of opposition political parties to highlight the drawbacks of the present government and to fulfil their inferior motives. Surprisingly, traditional economists still perceive GDP as a significant indicator to measure a country’s performance, while facts suggest that it is not only flawed but a narrow way to examine the economic wellbeing of a country. Urs Rohner, the Chairman of Credit Suisse, wisely says, “GDP metrics provide no indication of societies damaging their capital, such as withholding education room from certain groups or depleting natural resources for immediate economic benefit”. So, if the mode of comparison contains strong loopholes, then should it be accepted as a reliable indicator for a country’s overall economic assessment? Definitely not.
Even if we were to consider the comparison even in nominal US dollar terms, it is not rocket science to tell that such significant estimates cannot be achieved overnight. It would take several years, if not decades at least, for the economies to reach higher levels of growth. To its credit, Bangladesh has undertaken several reforms in the past few years to bring in efficiency to achieve higher levels of growth with resilience, as pointed out in the working paper of the World Bank. However, it goes without a saying that Bangladesh has its own challenges. Similarly, if certain sections in India feel that India has failed to achieve higher levels of growth, the responsibility and accountability for the same rest with the present and previous governments as well. If there is a natural dislike towards the market-oriented economy and the ideological framework is based on utopian ideals of socialism, it calls for introspection. As economist Arvind Subramanian says, “India has moved from crony socialism to stigmatized capitalism”. This calls for a fundamental change in the underlying framework which the economy operates on. Only then can India undertake reforms to accelerate economic growth.
However, the most challenging aspect is to recognize an appropriate economic reform that fits perfectly with a nation’s goals and capacity. The worldwide lockdown has created an uncertain situation for underdeveloped and developing countries to recover their already stagnant economies, with pre-existing social and political issues. An effective solution lies in strengthening fiscal reforms like reassessing subsidies and implementing tax measures. For example, Germany has waived-off the late payment penalties till 31st December 2020 if the debtor has been directly affected by the ongoing pandemic. Similar laws for short-time working compensations and providing beneficiaries for the affected labour community can act as a measure to ensure overall economic wellbeing. Apart from this, the funds to be provided by World Bank in order to strengthen the Indian Micro, Small and Medium Enterprise, can help in unlocking liquidity, strengthening the Non- Banking Financial companies (NBFC’s) and other small financial banks and improving the financial innovation of the country. In countries like Bangladesh and India, where the majority of the workforce consists of labours and workers, it is essential for the ruling government to protect their livelihoods. Government policy actions should mainly focus on providing unemployment benefits for unskilled labours, reimbursing COVID-19 related testing and generating work from home opportunities for skilled labours.
However, while it is asserted that there are multiple variables which are at play, the intervention of the government in the economy should be based on caution. While government intervention may be necessary for providing a safety net, it is indeed a slippery slope which the government should be aware of. The governments across the world may intervene in the economy citing ‘market failures’ during the pandemic. However, we also need to be aware of the fact that the ‘state failures’ are also a reality which cannot be discarded.
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