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