India Fourth Largest Economy? – 3 Articles

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The World’s ‘Fourth Largest Economy’ and its Deepest Divide

Kavita Kabeer

First things first, it’s a tad premature right now to say India has overtaken Japan and become the 4th largest economy. True, IMF’s projections for India for April are slightly higher than that of Japan’s. India at $4187.02 while Japan at $4186.43 billion.

So, both are going to be economies of $4 trillion. But the catch is these are the projected numbers. The cause behind this whole fiasco where the Niti Aayog CEO ended up making official statements about India being the 4th largest economy is a misreading of how IMF labels a year. FY 2024-2025 is the year 2024 as per IMF, so the $4 trillion projection is for the year 2025 that would mean FY 2025-2026.

As of now, India’s GDP is estimated to be at about $3.9 trillion, while that of Japan is around $4 trillion. We’ll know exactly what the size of the economy in FY 2024-2025 is by May 30, when official GDP figures for March quarter are released.

India may easily take over Japan in the near future, but right now, it is not the case. So, celebrations are a bit premature. As per IMF’s projections, India is slated to grow at 6.2% of GDP, while Japan’s real GDP growth percentage is 0.6. So, it’s certain India will overtake a weakening Japan in the near future, in the race of numbers, by sheer magic of maths.

It’s worthwhile to remember that Japan is a country of 123 million people, with a per capita income of $33900. While India is a country of 1.46 billion people with a per capita income of $2880.

Another comparison that appears is when China reached a $4 trillion economy, its per capita income was about $3500. And today after a decade of rapid economic transformation, its per capita stands over $13,000, while its economy is $19.23 trillion strong. In the largest economy, the US ($30.51 trillion), per capita income is $89,000. Even if we jump up two more spots, and take over not just Japan ($4.19 trillion) but also Germany ($4.74 trillion), our per capita would hardly resemble that of the other largest economies.

When you think of Japan, you think of high speed rail, shiny business centres and cherry blossoms falling on neat and clean roads and footpaths. So, come to the real bit, what does India becoming the fourth largest economy, mean for its people? How does it elevate their standard of living? Does it boost domestic consumption? What difference does it make to their lives?

GDP growth without shared prosperity

According to the World Inequality Report 2022, the top 1% of India’s population holds more than 40% of the nation’s wealth, while the bottom 50% own just 3%. In terms of income, the top 10% earn over 57% of national income.

This level of wealth concentration means that GDP per capita becomes a misleading metric. India’s GDP per capita stands at roughly $2880, but this is a mean average. If you remove the top 1% of earners from the calculation, the number drops dramatically.

For instance, if India’s GDP is about $3.9 trillion, and the top 1% controls 40% of that (i.e., $1.56 trillion), that leaves $2.34 trillion for the remaining 99% — nearly 1.4 billion people. This results in a per capita GDP of around $1,670, a far cry from the official average. If you remove the top 5%, who control about 62% of national wealth, the average per capita drops to just about $1100. That is less than 1 lakh rupees for an entire year and that’s where the majority lives. It is for this reason the govt has to give out free rations to 80 crore Indians.

A critical reason why India’s economic growth has not translated into mass upliftment is because the sectors driving GDP expansion are not the ones employing the majority of the population. India’s economic model is increasingly reliant on capital-intensive sectors: IT, finance, e-commerce, and large corporates. It is these sectors that generate high GDP numbers, but do not create jobs at scale. While actually a large number of the population is employed in the informal sector, with little to no social protection. Consider this, nearly 50% of Indian workforce is employed in agriculture, but the sector contributes only about 18% to the GDP. On the other hand, capital-intensive service sectors like IT, finance, and real estate contribute over 50% to GDP, but employ only 30% of the workforce and often concentrated in urban areas.

Even here, wages have been stagnant for years, and profit margins have dropped, throwing the middle class off its earlier growth trajectory. The middle class isn’t just being left behind in India’s skewed success story – it’s increasingly at risk of sliding downward.

At the same time, billionaires thrive. Gautam Adani’s net worth jumped from $9 billion in 2020 to over $100 billion by 2022 at one point. The stock markets soar, but over 90% of Indians have no exposure to equities. We are going to be the fourth largest economy with the largest number of the world’s poor.

The lesson for India is clear: economic growth without redistribution leads to social and political instability.

Unless India tackles inequality with bold action; progressive taxation, universal public services, labour formalization, and serious public investment; its rise as the world’s largest economy will be little more than a jackpot for its richest elite, and a mirage for everyone else.

(This article is an extract from the full article published on The Wire website. Kavita Kabeer is a writer and satirist. Courtesy: The Wire, an Indian nonprofit news and opinion website. It was founded in 2015 by Siddharth Varadarajan, Sidharth Bhatia, and M.K. Venu.)

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In another article also published in The Wire, Prof. Arun Kumar questions, Has India Really Become the World’s Fourth-Largest Economy? (extract):

As per the NITI Aayog CEO, B.V.R. Subrahmanyam, based on projections for 2025-26 made by the International Monetary Fund (IMF) in its World Economic Outlook, India’s nominal GDP is projected to rise to USD 4,187.017 billion, surpassing Japan’s estimated USD 4,186.431 billion.

Ignoring that India’s per capita income is one-thirteenth of Japan’s in nominal dollars; several critical factors also need to be taken into account.

One: The Indian economy has gone through four shocks since 2016-17 when demonetisation was announced. There was GST in 2017, the NBFC crisis in 2018 and a sudden lockdown in 2020. Given that GDP estimation is also based on projection from the previous year and using a benchmark from the reference year in the past, a shock would foul up this method.

It is likely to lead to an overestimation of GDP. For instance, in 2016-17, demonetisation caused markets to be empty, fruits and vegetables to rot in the fields, industries to close down, and yet, official data showed an above 8% growth for the year, instead of a negative growth.

A recent article points out that prior to 2016-17, the ‘discrepancy’ in GDP was small, but subsequently it has become large and unstable, swinging from positive to negative. It is also pointed out that officially, the ‘production side approach’ to measuring GDP is taken as the more reliable one. But it also has big errors due to the nature of the shocks experienced.

Two: The shocks have led to errors in the methodology used to measure the different components of GDP. Every sector of the economy has a private and a public component. The public sector is entirely organised. The private sector has an organised and an unorganised component. The data for the latter comes with a delay. In fact, for most of the quarterly GDP estimates, only limited organised sector data are available. So, estimates for the unorganised component of a sector are generated using the organised sector as a proxy.

Effectively, India’s official GDP is largely estimated using the organised sector data. This was possibly alright till the shock of demonetisation and subsequent shocks. But since demonetisation, the unorganised sector, which was badly impacted, has been declining.

The other three shocks also damaged this sector. Evidence for this decline has come from trade, leather goods, pressure cookers, luggage, etc. The organised component has been growing at the expense of the unorganised component but we are proxying the declining unorganised sector by the growing organised sector.

Agriculture is a large part of the unorganised sector, and its data comes routinely during every crop season. But, experts have been questioning the correctness of the official data.

A corollary of the decline of the unorganised sector is the aggravation of unemployment in India. If this sector were growing at anywhere like 6% per annum, the problem would not persist. The organised sector is getting increasingly automated and generates little employment. So, when it grows at the expense of the unorganised sector, it creates unemployment.

In brief, there is a need to reassess the claim that India’s GDP is growing fast and will cross that of Japan in 2025.

(Arun Kumar is a retired professor of economics at JNU. He is the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020. Courtesy: The Wire, an Indian nonprofit news and opinion website. It was founded in 2015 by Siddharth Varadarajan, Sidharth Bhatia, and M.K. Venu.)

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Crowing Over GDP Size vs. Real Progress

Prabhat Patnaik

The mercantilists had defined a nation’s prosperity in terms of the amount of precious metals it possessed and a nation’s progress in terms of the increase in the amount of its precious metals. For increasing the amount of precious metals, a nation had to have a favourable balance of trade in goods and services (its exports, that is, had to exceed its imports) which would then need to be settled through imports of precious metals, especially gold, so that the amount of gold in its possession increased.

The mercantilists had been the targets of Adam Smith when he wrote his opus, The Wealth of Nations. Smith’s position was that it was not its stock of precious metals that defined a nation’s wealth, as merchant monopoly companies, like East India Company claimed, but the amount of capital stock in its possession.

Progress, therefore, consisted in accumulating larger and larger stocks of capital, for which the most favourable condition was created through the removal of all restrictions imposed by the State on the freedom of functioning of markets and of capital, that is, by ensuring that conditions of laissez faire prevailed in the economy. The stranglehold of monopoly companies, such as the East India Company, on the State had to be removed to make this possible.

What was striking about Smith’s position was that, notwithstanding its revolutionary break with the earlier conception, it still focused on the nation rather than the people; it is the wealth of the nation, seen as an entity standing above the people, that counted as the desideratum. The conception of what should be counted as wealth had changed, from gold and silver to capital stock, but not the entity whose wealth was being talked about.

This idea of a nation that is distinct from the people and stands above them, was a feature of bourgeois nationalism that developed in Europe in the wake of the Westphalian peace treaties. While it reached its apogee under European fascism in the 1930s, the idea itself was a common theme running through the entire course of bourgeois thought.

Of course, while the nation supposedly stood above the people, “national interest” was necessarily identified with the interests of particular bourgeois segments. The shift from mercantilism to Adam Smith accordingly entailed a shift from apotheosizing the interests of monopoly merchant companies, like the East India Company, as being synonymous with “national interest”, to treating the interests of the emerging manufacturing bourgeoisie as the embodiment of “national interest”.

Promoting the interests of this latter segment of the bourgeoisie now became synonymous with advancing the interests of the nation. But this shift was effected while sticking all the time to a conception of the nation whose interests had to be promoted and which was an entity distinct from and standing above the people.

British economist David Ricardo had exactly the same notion of progress as Adam Smith, namely, the accumulation of capital stock within the nation. His fear that there would be a move toward a stationary state where capital accumulation would cease to occur, arose precisely from the notion that capital stock constituted the nation’s wealth; cessation of capital accumulation would mean the end of progress.

British economist John Stuart Mill was no doubt an exception in this respect, since he professed not to be worried by a stationary state if the workers were better off under it than they had been when the economy was experiencing capital accumulation. That is, unlike his predecessors such as Smith and Ricardo, he placed workers’ well-being above capital accumulation, but this deviation of his from the position of classical political economy could be explained by the fact that he had been moving toward a certain socialist position under the influence of his wife, Harriet.

Classical economists like Smith and Ricardo, however, should not be criticised too strongly for focusing on the magnitude of capital stock (and the amount of output that it produced) as the desideratum, rather than on the well-being of its working population. They had much sympathy for workers but they believed that workers tended to procreate rapidly if there was an improvement in their material condition of life (an idea that found expression in the Malthusian theory of population).

If real wages rose above a subsistence level, then population would increase, and so would labour supply, which would then bring real wages back to the subsistence level. It followed that any improvement in workers’ condition of life depended only upon themselves. It is they who had to change their habits and restrain the growth in their numbers even when they faced an improvement in their living condition; only then could they retain whatever improvement occurred in their lives.

Since policy could not do anything about this, the focus of policy had to be on an increase in the total capital stock, and hence on an increase in output; this increased the total amount that was available for all, from which the workers could get a larger share if they changed their habits.

The same latitude that one can give to Smith and Ricardo, however, cannot be given to the so-called “mainstream” bourgeois economics of later vintage. The belief in the Malthusian theory of population had ended long ago. Indeed, Marx’s description of this theory as a “libel on the human race” would find general acceptance today, unlike in the late 18th and early 19th centuries.

Even so however “mainstream” bourgeois theory still takes the level of the gross domestic product (GDP) as the index of prosperity of a “nation” and its rate of growth as the index of its progress. Since “progress” in this sense can be achieved only by the actions of the capitalists, the “nation’s” interest, it would follow, is best served by humouring the capitalists, by providing them with incentives, by promoting their interests, and by treating them as privileged beings.

While Smith and Ricardo might have taken this position because they thought (erroneously) that nothing else could be done anyway until workers changed their habits, for latter-day economists to take the same position represents a pure ideological bias.

The latest example of this bias is the announcement by the CEO of NITI Aayog that India is now the fourth largest economy in the world, having just overtaken Japan in terms of the size of its GDP that has now crossed $4 trillion. The NITI Aayog CEO did not just happen to mention this in passing; he made it a point to mention this as a ‘great achievement’, and, not surprisingly, this development has been lauded by members of the Indian big business segment.

It is significant, however, that the fact of India’s having a population that is more than 10 times that of Japan was not mentioned by the CEO. His crowing was exactly on a par with Prime Minister Narendra Modi’s remark some time ago that India would soon have a GDP of $5 trillion.

But quite apart from the question of the size of the country, which makes all such claims based on comparing the absolute magnitude of our GDP with those of advanced capitalist countries, meaningless, focusing on GDP itself represents a totally false perspective. Not only is it a throwback to an old perspective that had believed in Malthusianism, but is completely out of sync with a democratic society. In a democracy it is the people’s living condition that matters, and progress must be measured entirely in terms of the extent to which these conditions are improving.

This perspective is also at variance with the perspective of our anti-colonial struggle. The concept of a “nation” whose exceeding Japan in its GDP is supposed to be a matter for celebration, is of a “nation” that stands above the people, whose “glorious” achievement is totally unrelated to people’s condition of life; this is completely anathema to the spirit of the anti-colonial struggle that had seen the liberation of the “nation” from imperialist rule as being synonymous with the liberation of the people.

Not only does the condition of the people, however, continue to be almost as miserable after more than three quarters of a century of Independence, with India occupying in 2024 the 105th rank in the Global Hunger Index among the 127 countries for whom that index is prepared, but we actually have a government that, instead of being ashamed of this fact, is crowing over the size of our GDP.

[The writer is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Courtesy: Newsclick, an Indian news website founded by Prabir Purkayastha in 2009, who also serves as the Editor-in-Chief.]