Tuesday Brief

Recently, there was report by IMF which predicted that this year Gross Domestic Product  (GDP) of Bangladesh will surpass India’s GDP.

Bangladesh is set to beat India in per capita gross domestic product (GDP) in the calendar year 2020, says data from the IMF World Economic  Outlook. Bangladesh’s per capita GDP in dollar terms is expected to grow @4% to $ 1888, which will be little above India’s GDP.

What Is GDP

GDP measures the total value of all final goods and services produced within a country’s borders during a period of time, which takes into account the value of goods produced by a country’s residents regardless of whether they live inside the country or abroad.

GDP is one of the most widely used tools to measure a country’s economy, and it is calculated by countries themselves as well as occasionally by world organizations such as the World Bank, the International Monetary Fund, and the United Nations. In the United States, U.S. GDP is measured quarterly by the Bureau of Economic Analysis (BEA) at the United States Department of Commerce and it is used by the Federal Reserve to calculate monetary policy.

What Is the Formula for Calculating GDP

There are three different ways that economists and statisticians can calculate a country’s GDP and they should all, theoretically, produce the same number:

1. Expenditures. This is the value of everything that is purchased within the country plus that country’s net exports to other countries.
2. Income. This is the income of all the individuals and businesses within the country. Also called domestic income.
3. Production. This is the market value of everything that is produced within the country.

When the IMF report came, all the hell broke loose in Indian media and opposition leader Rahul Gandhi started criticising NDA govt. One thing is not cleared by IMF, while calculating the GDP figures which method was used.  Responding to Rahul Gandhi, the Centre has said that India’s Gross Domestic Product (GDP) in terms of Purchasing power parity (PPP) in 2019 was 11 times more than Bangladesh.

 

In purchasing power parity terms, India’s per capita GDP in 2020 is estimated by IMF at $6284 compared to $5139 for Bangladesh

Purchasing power parity (PPP) is a measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies – essentially how much an equal value of money (say a standard such as $1) can purchase in a country or how much a standard item (say a McDonalds Big Mac) is priced differently in different countries, whereas Per capita gross domestic product (GDP) is a metric that breaks down a country’s economic output per person and is calculated by dividing the GDP of a country by its population.

 

What are the views of economic experts on this comparison

 

• The India vs Bangladesh GDP per capita comparison (post IMF report) has sparked controversy, but wrong numbers have been compared.
• On appropriate matrix, India has not been surpassed and highly unlikely in future.
• All the focus has been on comparisons based on GDP measured at current, market exchange rates and this yields “conclusion” of Bangladesh eclipsing India. But market exchange rates are not appropriate for welfare comparisons across time and countri GDP per capita is an estimate for one indicator of the average standard of living/welfare in a country.
• That more appropriate basis is GDP at constant, purchasing power parity (PPP), exchange rates.
• India will return to pre Covid level of real per Capita GDP only by 2022.

In India, a number of media outlets have lauded Bangladesh’s achievement and suggested the Indian policymakers reflect on what went wrong in India and what worked for Bangladesh. Indian opposition political party saw it as the failure of the current Modi government. Many have blamed the weak management of Covid-19 which had a negative impact on the Indian economy.

For both countries, there is no reason to overreact to these projections on per capita GDP for a number of reasons.  First, using GDP as an indication of achievement has been criticised by economists for long. One thing more is certain that higher purchasing power  of Bangladeshi people will create higher demand for Indian goods and services. This will in turn increase India’s export income from Bangladesh. Medical tourism to India by Bangladeshi patients is increasing every year. A large number of Bangladeshi students are also pursuing education in India.

 

As per latest IMF’s latest ‘World Economy Outlook’ report, India is likely to bounce back with an impressive 8.8% growth rate in 2021, thus regaining the position of the fastest growing emerging economy, surpassing China’s projected rate of 8.2%.

 

Lastly it seems not proper to compare Bangladesh’s GDP with India, as India is much bigger country in area and population wise, and the size of Indian economy is much bigger. Additionally India is badly hit by Covid this year as compared to Bangladesh, which has affected its economy and GDP very badly. It is but natural that within one year India will bounce back, till that time people like Rahul Gandhi will keep on commenting on any issue without checking and analysing the reason.

Waiting for your feed backs/views/comments.

 

Anil Malik

Mumbai, India

20^th October 2020