Even though high annual or quarterly growth rates of GDP, national income, GVA and other variables carry about them an aura of hope, an isolated annual growth rate ought not be a dependable index of welfare.
To put it crudely, people consume apples, oranges, automobiles, hospital and school services through the year, not the GDP growth rate. The rate at which economic production is growing as a whole is a matter of concern of course. The higher it is, the more pleased policy makers ought to be. However, speaking merely in terms of a quarterly growth rate for 2017-18 has little to commend for itself.
To illustrate the issue, consider the latest GDP series for India computed at fixed 2011-12 prices. According to the latest available (MOSPI) data, the real per capita national income in 2017-18 was Rs 86,668. Since this figure is calculated at 2011-12 prices, one may use the RBI published average INR-US $ exchange rate prevailing in that year, viz. Rs 47.92 per dollar, to come up with a dollar equivalent of $1808.6. This is not exactly an encouraging figure, not one at least that should earn us the distinction of an Asian Tiger, especially so in comparison with China which has grown at a slower rate than India in 2017.
Matching Per Capita Income Growth and GDP Growth
India's average growth rate during 2011-12 through 2017-18 has been 5.3 percent. Robert Lucas, who won the Nobel Prize in 1995, had argued in terms of an elementary exercise that the per capita national income of an economy growing at a sustained x per cent annual growth rate will double in 70/x years. Using this simple formula, India's per capita national income will be $3,617 (at 2011-12 prices and exchange rate) around the year 2030-31, i.e. 13 years from now. If the average rate rises, we will reach the figure earlier.
Compare this with China. Unfortunately, exactly comparable figures for China's per capita national income are not available. However, we may proceed with per capita GDP, a variable closely linked to per capita national income. The Federal Reserve Bank of St. Louis database gives comparable figures for China and India, both calculated at 2010 prices and exchange rates. Going by this data, India's per capita GDP for 2016 was $1,861.5, while China stood at $6893.8. How long will India take to catch up with China's per capita GDP?
Lucas' rule of thumb throws up an immediate answer. Assuming that India maintains an average annual growth rate of 6% or so, it will require us a little more than 21 years to reach the 2016 Chinese figure. In the meantime, China will have grown too, making our task harder still. Of course, if our average growth rate turns out to be even higher, then we shall reach Chinese levels sooner. How high an annual growth can we really hope to sustain? Looking back at history, Singapore's average growth rate had been 5.4% during the miracle years 1960-97, during which it managed to achieve a per capita GDP of $17,559.
Hold Onto That Champagne
The fact that the Chinese growth rate has fallen below the Indian rate for an isolated year is not cause for celebration yet. To repeat, what's called for is sustainable growth, as in Hong Kong, Singapore, South Korea and Taiwan. The way things stand, we have reached a 7.7% growth rate for the last quarter of 2017-18 alone. The annual rate is projected to be 6.7%. We should thank our lucky stars if the latter rate sustains over the next two decades or so.
Dipankar Dasgupta is former Professor of Economics, Indian Statistical Institute, Delhi and Kolkata
First Published: IST