The Indian growth story, especially since 2014, has been dynamic, attracting major attention from businesses and global pundits of finance and economy.
The Indian GDP has been one the most bullish in recent years, coasting at above 7 percent in 2022-23, a figure that exceeded the expectations of most, especially in a war-watching global economy that is fraught with geopolitical fault lines getting in the way of international trade. As of the most recent Purchasing Power Parity (PPP) calculations by the World Bank and the International Comparison Programme (ICP), India ranks 3rd in the world in terms of GDP by PPP.
India now accounts for 6.7 percent ($8,051 billion out of a total of $119,547 billion) of world GDP in terms of PPPs, compared to 16.4 percent and 16.3 percent, respectively, for China and the United States.The PPP figure is what offers a unique, and optimistic trend, for Indians as it shows the relatively strong purchasing power in domestic currency, implying that the average Indian faces a comfortable cost of living, closely comparable to the largest economies of the world.
The table below shows the nominal GDP at PPP for India, and in PPP terms, which focuses on the purchasing power of the domestic currency within the economy, India is already the third-largest economy, well above Japan and Germany. Further, at the end of 2027 (FY28 for India), the US economy would be only about 1.7 times that of India in PPP terms. In the next few decades, if India can maintain a real growth of about 6 percent to 7 percent, it would be possible to catch up with the US economy.
The achievement of Indian governance of the economy is starkly understood in the following set of graphs below. While currently the nominal GDP is below Germany, Japan and UK, it is poised to overtake these countries in 2026. However, even before that, the Indian projected nominal GDP is much steeper than the other countries, implying a bullish and high year on year growth.
However, the graph below shows the significant improvements in purchasing power that the Indian economy has maintained over other countries, with the gap between Indian and Germany, Japan and the UK being significantly wide.
Table 2 puts the Indian economy in context, in terms of the economies of UK, Germany and Japan. As of 2024, the Indian economy when seen at PPP is 3.6 times that of the UK, 2.1 times that of Japan, and 2.5 times that of Germany.
While most advanced economies (AEs) are facing an economic slowdown, chronic shortages, high inflation, and ageing populations, the Indian economy is acknowledged to be the fastest-growing large economy by major multilateral organisations, including the IMF.
The Expansion of The Indian Consumer: Burgeoning Middle Class Amidst Low Cost of Living
The implications of a high PPP nominal GDP can be easily understood in the growing strength of the Indian consumer in recent years. PPP allows us to understand and make comparisons between two countries- in this case, India and other high income countries such as Germany, Japan, etc- about the price of the same goods and services. Thus, a PPP analysis shows the price of the same goods and services in different economies, adjusted for parity. A high PPP implies that a basic set of essential goods and services is cheaper inside India, for an Indian consumer, than the same basket would be for a consumer in Japan, Germany or the UK. To put it simply, India has made significant improvements in public life and economy allowing for a low cost of living, across the population. This has also resulted in India being generally safe against inflation shocks and shocks of the global economy.
The Indian middle class, therefore, is increasingly well off, while also expanding significantly. Estimates based on the PRICE's ICE 360 pan-India primary surveys across 2014, 2016 and 2021, suggest that the population of deprived and aspiring people will decrease from almost 1.1 billion to 150 million in the 2040s. The top income segment - the rich - will soar from 30 million to an estimated 310 million, while the huge bulk of the population will comprise a middle class of nearly 1.25 billion.
By 2047, if political and economic reforms have their desired effect, the income pyramid will gradually develop into a 'fat lady' - with a smallish bottom of the deprived and aspirers, a huge bulge in the middle of the middle class and a big head of the rich.
Eradication of Extreme Poverty at the Global US $1.9 PPP Poverty Line
Along with improvements in general purchasing power of the middle class, and a low cost of living, India has also almost completely eradicated extreme poverty at the global PPP poverty level of US$ 1.9. The World Bank categorises those in ‘extreme poverty’ as those who live on less than US $1.9 PPP per day globally. According to an IMF working paper from 2022, this figure has remained less than 1 percent since pre-pandemic times for India, reaching its lowest in the pre-pandemic year of 2019 with a 0.8 percent.
This eradication of extreme poverty has uniquely occurred due to a mix of efficient social security measures and targeted foodgrain distribution by key Union Government schemes. The IMF paper concluded that the food handouts primarily had a substantial impact on keeping the levels of extreme poverty low. This study highlights the effect of food transfer and social security schemes on poverty alleviation and purchasing power of the poor. As a result of robust food grain coverage and distribution, the shocks in food price and income levels were offset by the scheme, allowing beneficiaries to remain above the poverty line in terms of purchasing power.
The primary discussion of food transfers in the IMF working paper arises from the results of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), announced in March 2020 to ease the pressures caused by the pandemic. According to PMGKAY, each individual of an impoverished household receives an additional free 5 kilograms of grain over the existing 25 kilograms of subsidised food grains under the prevailing National Food Security Act (NFSA).
As of November 2023, this scheme was extended for another 5 years. This will ensure that any future shocks arising from global events and food inflation will not worsen the condition of the poor in India. Picture 2 below shows the expanded coverage as of the extension of the PMGKAY.
What Works for India, and Potential Challenges
Several global analysts have declared India as the next great economic power: Goldman Sachs predicted it will become the world’s second-largest economy by 2075, and Financial Times has suggested that by 2050, India’s purchasing power will be 30 percent larger than that of the U.S. Several demand and supply factors are crucial in achieving this, most of which show certain positive trends.
On the demand side, India is facing a consumer boom, with significant improvements in consumption power being seen in the economy each year. India’s growth will be driven mainly by domestic consumption and investments. Real wages are expected to grow at above 4 percent, and disposable income is expected to grow by about 15 percent. Industries prevalent in the West are fast-growing industries in India, and consumer durables were expected to grow by about 15-18 percent in 2023. On the supply side, by 2030, India’s working-age population is expected to be 1.04 billion. The working-age population bulge is expected to last till 2055. Additionally, India also has the largest pool of English-speaking STEM graduates in the world.
Infrastructurally, India is on the right track, in recent years. India has been adding 10,000 km of highways annually. The number of Indian airports has doubled and an upgraded train system will have new high efficiency “freight corridors” connecting the economic centres of India. Additionally, one of the most impressive changes has been in the digital infrastructure. With 881.25 million internet subscribers, India has the second-highest internet-enabled population in the world behind China’s 1.05 billion. As a result, the Digital Payments Infrastructure has seen a huge boom, making India the leading country in the world in terms of digital payments. All of this has helped make public services and credit more easily accessible to a wider swath of the population.
India stands in a favourable position today, both in terms of economic growth and domestic cost of living. It remains then, to ensure this robust foundation is effectively steered towards realising the full future potential of the modern Indian economy. Going forward, India should ensure this tradition of good governance continues. Fostering Centre-State cooperation will allow wider coverage and better implementation of Central Schemes, ensuring that improvements in standard of living continue for the foreseeable future.
The author Navneet Sehgal is the Retired Additional Chief Secreatry, Uttar Pradesh.
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