India

Is Bangladesh’s Per Capita Income “Really” Greater Than That of India?

For a story to go viral on the social media, it needs to be simple and straightforward. In fact, the story should be summarisable in a headline.

The story of Bangladesh’s per capita income overtaking that of India is precisely that kind of story. John Lanchester defines per capita income in his book How To Speak Money as: “The total Gross Domestic Product(GDP) of a country divided by the number of people in the country…It is a measure of how rich the country’s citizens are on average.”

In simple terms what this story told us is that the average income of Bangladesh was more than that of India and hence, an average Bangladeshi was richer than an average Indian (Actually, it may not be so. You can understand why I say so here. But that’s what the conclusion drawn was).

No wonder the story got picked up and no wonder it has become viral.

Dear reader, you might be wondering by now if the story is that simple why am I writing about it? The answer will soon become clear.

Let’s first take a look at the following chart. It plots the per capita income of India and Bangladesh.

Bangladesh overtakes India?


Source: International Monetary Fund.

A few days back, the International Monetary Fund published the World Economic Outlook (WEO) for October 2020. It also released a lot of data along with it. The above chart is plotted using data from the database which accompanied the release of the WEO.

As per the above chart, India’s per capita income in 2020 will be $ 1,876.53. In comparison, the per capita income of Bangladesh during 2020 will be $1,887.97. This is around 0.6% more than the Indian per capita income. The difference is very small but there is a difference.

All the song and dance about India versus Bangladesh came from this data point. Everyone picked up this data point, the media, the economists, the analysts, the influencers and finally, the politicians as well.

But what no one bothered to elaborate on is that the WEO data also tells us that India’s per capita income will be higher than Bangladesh between 2021 and 2023, and in 2024,  Bangladesh will overtake India again.

The point is that there is a lot of nuance in this data, which the headline of Bangladesh per capita income overtaking India’s, doesn’t really summarise. But who was bothered. It made for a great story and people ran with it. As the old newspaper cliché goes, if it bleeds, it leads.

Nevertheless, there is one thing that I haven’t told you up until now. What is that? The per capita income in the above chart and what we have been discussing until now, is in nominal terms (or current prices). This basically means that it hasn’t been adjusted for inflation. The inflation in Bangladesh since 2014 has been higher than India. The following chart plots that.

Faster price rise in Bangladesh

Source: International Monetary Fund.

A higher inflation reduces the purchasing power of a currency and that needs to be adjusted for. The International Monetary Fund provides data after adjusting for inflation and purchasing power parity (that is how much does a currency really buy), as well.

Take a look at the following chart, it plots the per capita income of India and Bangladesh, adjusted for inflation, in constant terms.

India is ahead of Bangladesh

Source: International Monetary Fund. Purchasing power parity; 2017 international dollar.

Once we adjust for inflation and purchasing power, the Indian per capita income is higher than that of Bangladesh. The trouble is that by now this story has become too complicated to go viral.

It’s no longer as simple as Bangladesh’s per capita income overtaking India. And India’s per capita income continuing to be higher than that of Bangladesh is not much of a story. I mean after all we are competing with China and not with a puny Bangladesh. (I am saying all this to explain why a certain kind of story in economics tends to go viral on the social media. We all want simple binary explanations that do not tax our minds much).

The story doesn’t end here. There is more to come. While Bangladesh’s per capita income continues to be lower than that of India, it is rapidly catching up. Let’s take a look at the following chart. It plots the ratio of the Indian per capita income to the Bangladeshi per capita income, using data used in the previous chart which has been adjusted for inflation and purchasing power parity.

Bangladesh is catching up


Source: Author calculations on IMF data.

As per this chart, India’s per capita income was 43% more than that of Bangladesh in 2016. The difference has been falling ever since. In 2021, the difference will fall to 20%. This basically means that Bangladesh is rapidly catching up on India.

Bangladesh has been doing better than India on a whole host of non-income indicators.

1) As per the Human Development Index, India’s life expectancy at birth in 2018 was 69.4 years. That of Bangladesh was 72.3.

2) This is primarily because India has a higher mortality rate of children under 5 years. In the Indian case, the mortality rate is 39.4 per 1,000 live births. In Bangladesh it is at 32.4. This means that fewer children die in Bangladesh before achieving the age of five. This explains why average life expectancy in Bangladesh is higher.

3) The child malnutrition rate in Bangladesh (% of children under 5) in Bangladesh is 36.2%. In India it is at 37.9%. A greater proportion of Indian children under the age of 5 are malnourished. Of course, the absolute numbers are much much more in the Indian case.

4) Bangladesh has much higher immunisation rates for diseases like DPT and measles than India. The rate of malaria incidence is higher in India, with 7.7 per 1,000 people being at risk. In case of Bangladesh, 1.9 per 1,000 people are at risk. The rate of tuberculosis incidence is higher in Bangladesh.

5) Interestingly, the current health expenditure in case of Bangladesh is at 2.4% of its GDP. India spends 3.7% of its GDP. But clearly the money is being much better spent in Bangladesh.

6) Bangladesh also does a lot better on a whole host of work and employment indicators. The employment to population ratio in case of Bangladesh is 56.2%. In case of India it is 50.6%. Clearly a greater proportion of Bangladeshi population is employed.

7) This is reflected in the higher labour force participation rate (people of the age of 15 and above it, who are a part of the labour force) of 58.7% in case of Bangladesh. In case of India it is at 51.9%. More interestingly, the labour force participation rate in case of Bangladeshi women is at a much higher 36% against 23.6% in India.

8) 55.5% of the employment in Bangladesh can be categorised as vulnerable employment. In case of India it is at 76.7%. A higher proportion of Indian jobs are at the risk of being lost.

9) 33.4% of the statutory age pension population in Bangladesh gets pension. In India, it is at 25.2%. On the flip side, a higher proportion of non-agricultural employment in Bangladesh is informal (at 91.3% against India’s 74.8%).

10)  43.9% of India’s labour force is employed in agriculture against Bangladesh’s 40.2%. Clearly, Bangladesh has been able to move people away from agriculture into other ways of earning money faster than India. 39.4% of the country’s employment is in the services sector against India’s 31.5%.

11) The sex ratio in Bangladesh (male to female ratio) at 1.05 is better than India’s 1.10. In India there are 100 females per 110 males on an average. In Bangladesh there are 100 females per 105 males on an average.

12) 97.3% of the population in Bangladesh has mobile phone subscriptions. In India it is at 86.9%. Having said that, India’s internet penetration at 34.5% of the population is higher than Bangladesh’s 15%.

13) The Gini coefficient, a measure of income inequality within a country, is lower in case of Bangladesh at 32.4 against India’s 35.7.

14) When it comes to schooling, the expected years of schooling in India stands at 12.3 years. In case of Bangladesh it is slightly lower at 11.2 years. Having said that, the rate of literacy among adults (15 years and older) in Bangladesh is at 72.9% against India’s 69.3%. This, despite the fact that the government expenditure on education in India amounts to 3.8% of the GDP, against Bangladesh’s 1.5% of the GDP. One possible explanation for this lies in the fact that India spends much more on higher education than Bangladesh.

15) The mean years of schooling for females in Bangladesh is at 5.3 years against India’s 4.7 years. On the flip side, the primary school dropout rate in Bangladesh is much higher at 33.8% against 12.3% in India’s case.

16) All the above data has been taken from the Human Development Index. With a score of 0.647 India ranks 129th on the index. Bangladesh on the other hand has a score of 0.614 and ranks 135th on the index. But there is a simple explanation for this. As Swati Narayan wrote in The Indian Express, in February this year: “While, technically, on the Human Development Index, Bangladesh scores marginally less, this is largely because the index merges income and non-income parameters.”

On many non-income indicators (as we have seen above) Bangladesh comes out better than India. Take the case of the Global Hunger Index. India ranked 94th among 107 countries. Bangladesh was at the 88th spot. Both countries have a level of hunger that is serious. But in case of Bangladesh, the situation is a little better. Even the World Happiness Report reported Bangladesh to be a much happier country than India.

17) India’s exports are much more than that of Bangladesh. But when it comes to exporting readymade garments (something that can create a huge number of jobs), Bangladesh has been doing much better than India for a while now. Take a look at the following chart, which compares India and Bangladesh’s garment exports.

Bangladesh beats India

Source: Bangladesh Garment Manufacturers and Exporters Association, Centre for Monitoring Indian Economy and the Dhaka Tribune.

The reasons for this success are explained in this piece I wrote for Mint.

Not for a moment am I suggesting that India is doing worse than Bangladesh on all parameters. It is not. But over the last two decades Bangladesh has managed to narrow the gap on many parameters especially those on the social, health, gender and work front.

If this continues, in the years to come it won’t be difficult for Bangladesh to overtake India’s per capita income, especially if we continue with what has now become the all-encompassing nothing is wrong and all is well rhetoric.

Of course, meanwhile both sides will continue to spin data in ways that are useful to them. The chances that you will see spin with data are more these days than the chance of a ball spinning on a cricket pitch.

The US Economy Contracted by 9.1% and not 32%. India’s Economy Contracted by 23.9%.

Summary: I had absolutely no plans of writing this. But given what has been happening on Twitter and WhatsApp since the morning, I was forced to write this. Please read and share widely.

There is a full-fledged controversy raging on the internet where people have said that the economy of the United States, as represented by its gross domestic product (GDP), contracted by 32%, during April to June 2020. This was worse than India’s contraction of 23.9%.

This comparison is totally wrong. The way the United States reports GDP growth/contraction is different from the way India does. Let’s try and understand this in detail.

In April to June 2020, the US economy contracted by 9.1% in comparison to January to March 2020. This is a quarter on quarter comparison. This figure is then annualised.

How do we annualise it?  We do that by assuming that the US economy will continue to contract by 9.1% quarter on quarter, over the next three quarters (basically we compound in a negative direction, since the economy is contracting). Let’s understand this through a simple example.

So, let’s say during the January to March 2020, the size of the US economy or its GDP was $100. In April to June 2020, this contracted by 9.1%. The size of the economy came in at $90.9 ($100 – 9.1% of $100).

In July to September 2020, the economy will contract further by 9.1% to $82.63 ($90.9 – 9.1% of $90.9).

In October to December 2020, the economy will contract further by 9.1% to $75.11 ($82.63 – 9.1% of $82.63).

In January to March 2021, the economy will contract further by 9.1% to $68.27 ($75.11 – 9.1% of $75.11).

Hence, by the end of one year, the economy has contracted from $100 to $68.27 or by 31.73%, which is nearly equal to 32%.

This is how the GDP growth/contraction numbers in the US get reported. Hence, by this logic, on an annualised basis, the US economy contracted by close to 32% in the period April to June 2020, in comparison to January to March 2020. But this figure can’t be compared with the Indian figure.

The Indian system is different. The GDP during a particular quarter is compared to the GDP during the same quarter in the last year. In the Indian case, the GDP contracted by 23.9% during April to June 2020, in comparison to April to June 2019 (and not January to March 2020, as is the case with the US). The Indian comparison is a year on year one and not a comparison with the previous quarter. The US comparison is a quarter on quarter comparison which is then annualised.

If the US were to report the GDP growth/contraction in the same way as India, its GDP during April to June 2020 contracted by 9.1% in comparison to the GDP between April to June 2019. The Indian economy contracted by 23.9% during the same period. That’s the right comparison.

This is the right way of looking at things and not how they are being misrepresented on the social media, even by experienced economists.

Small isn’t always beautiful

Many people these days find it difficult to believe that the Chinese per capita income was lower than the Indian per capital income up until 1990. Only in 1991, did China go ahead of India.

Data from the World Bank shows that in 1990, the Indian per capita income was $375. The Chinese were at around $318. In 1991, the Chinese per capita income rose gradually to $333, whereas India’s came down to $309.

Between 1990 and 2015, the Chinese per capita income went up more than 25 times to $8,028. On the other hand, the Indian per capita income, went up by around 4.3 times to $1598.

Hence, the Indian per capita income is 80 per cent less than that of China, though a little over half a century back we were at the same level. There is a lot that China did in between and India did not. Trying to summarise that in one column of around 650 words is not possible. Nevertheless, there is one basic point that needs to be made.

China benefitted from a massive economy of scale in its manufacturing sector. Economy of scale essentially refers to the savings in costs as companies grow bigger and produce more. As George Stigler writes in The Scandal of Money: “Perhaps the most thoroughly documented phenomenon in all enterprise, learning curves ordain that the cost of producing any good or service drops by between 20 percent and 30 percent with every doubling of total units sold. The Boston Consulting Group and Bain & Company charted learning curves across the entire capitalist economy, affecting everything from pins to cookies, insurance policies to phone calls, transistors to lines of code, pork bellies to bottles of milk, steel ingots to airplanes.”

The point being that as companies grow bigger and produce more, the economy of scale essentially ensures that costs keep coming down. This makes companies more and more competitive as they keep growing bigger. As Stigler writes: “Growing apace with output and sales is entrepreneurial learning, yielding new knowledge across companies and industries, bringing improvements to every facet of production, every manufacturing process, every detail of design, marketing and management.”

China’s manufacturing sector was built on large factories churning out stuff at rock bottom prices, allowing them to compete all over the world.

This is something that the Indian industry in general and manufacturing in particular totally missed out on. The National Manufacturing Policy of 2011 estimated that the number of Small and Medium Enterprises (SMEs) in India stood at over 26 million (2.6 crore) units. They employed around 59 million (5.9 crore) people. This means that any SME, on an average, employed 2.27 individuals.

The Boston Consulting Group estimated that 36 million (3.6 crore) SMEs (or what it calls micro-SMEs) employ over 80 million (8 crore) employees. This means that any SME, on an average, employs 2.22 individuals. These firms are responsible for 45 per cent of the manufacturing output of the country.

What this tells us is that an average Indian manufacturing firm is very small. It lacks economies of scale and in the process is not able to compete internationally and even locally. This explains why so many products that we use in our daily lives are now Made in China.

One area where this is more than obvious is in the apparel sector. The Chinese are vacating this sector given that their labour costs are going up. It was expected that India would capture this vacant space. But that is not happening because Indian apparel firms lack scale.

As the latest Economic Survey points out: “One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam. An estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively.”

To conclude, small isn’t always beautiful.

The column originally appeared in the Bangalore Mirror on March 15, 2017

Will Chinese Jobs Come to India?

china

One of the themes that I have regularly explored in the Diary is the fact that one million individuals are entering the workforce every month and there aren’t enough jobs going around for them. This basically means that around 12 million or 1.2 crore youth enter the Indian workforce, every year.

And how many jobs are available for them? As a recent newsreport in the Business Word magazine points out: “According to the Labour Bureau of India, only 1.35 lakh jobs were created in 2015 and 4.93 lakh in 2014 across eight sectors.” Hence, there are barely any jobs being created for those entering the workforce.

Given the fact that so many individuals are entering the workforce every year, India needs a large burst of economic activity in labour intensive sectors which can employ India’s largely low-skill, semi-skilled and unskilled workforce. Only then will the country be able to put its so called demographic dividend to good use.

So, which are these labour intensive sectors that have the potential to employ India’s burgeoning workforce? The apparel sector and the leather and footwear sector are two such sectors. As the Economic Survey of 2016-2017 points out: “The data show that the apparel sector is the most labour-intensive, followed by footwear. Apparels are 80-fold more labour-intensive than autos and 240-fold more jobs than steel. The comparable numbers for leather goods are 33 and 100, respectively. Note that these attributes apply to the apparel not the textile sector and to leather goods and footwear not necessarily to tanning.”

Take a look at Figure 1.

Figure 1: Jobs to Investment Ratio for Select Industries

Figure 1 tells us that the apparel sector creates close to 24 jobs per lakh of investment. For a similar investment, the steel sector creates almost no jobs. On the other hand, the leather and footwear sector create around seven jobs per lakh of investment. Hence, these sectors have a great potential to create jobs, given that they don’t need a lot of investment to create jobs. Also, they have a huge potential to create jobs for women.

As mentioned earlier, it is estimated that nearly one million Indians are entering the workforce every month. This number is based on the assumption of a very low female labour participation rate. The men make up for a bulk of the Indian workforce, with women forming a small part.

Nevertheless, the thing is that more and more women are likely to join the workforce in the years to come. And if that turns out to be true, then the estimate of one million Indians entering the workforce every month, will turn out to be an underestimate. In this scenario, if the sectors like apparel and leather and footwear expand, they are likely to create the required jobs.

Over and above this, as the Economic Survey points out: “The opportunity created for women implies that these sectors could be vehicles for social transformation… In Bangladesh, female education, total fertility rates, and women’s labour force participation moved positively due to the expansion of the apparel sector.”

The interesting thing is that there is an immediate opportunity here. In the last two decades, China has seen an explosion of economic growth. In this scenario, the per capita income in the country has gone up many times over. In 1995, the per-capita income had stood at $610 (current US $, World Bank data). By 2015, this had exploded more than 13 times to $8,028.

This tells us that the labour costs in China have gone up. Some of the goods that it used to produce earlier, and on which a lot of economic prosperity was built, it is no longer competitive in. As far as labour cost goes, India is well -positioned to cash in on this. If labour cost was the only concern, businesses which produce apparel, leather and footwear, should have been moving their manufacturing from China to India.

This becomes clear from Figure 2. The minimum wages for semi-skilled labour in most Indian states are lower than Vietnam, China and Indonesia. Despite this, the space being vacated by China is not being taken over by India.

Figure 2: Minimum Wages for semi-skilled workers

As the Economic Survey points out: “The space vacated by China is fast being taken over by Bangladesh and Vietnam in case of apparels; Vietnam and Indonesia in case of leather and footwear. Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia.”

If India firms are leaving India and setting up apparel and leather firms in other countries, it is not surprising that the space being vacated in China is moving to other countries and not India.

This is a point I make in my new book India’s Big Government-The Intrusive State and How It is Hurting Us: “In fact, if we look at the cost factor, India has the second lowest manufacturing cost (Indonesia is lower) among the top 25 exporting countries in the world. Nevertheless, it is important to realise here that companies set up a manufacturing base in China not just because of the low cost, but also because of the very good infrastructure that was available. And such an infrastructure is clearly not available in India right now. Indeed, almost all countries in East Asia offer an easier working environment than what is available in India.”

Hence, when it comes to capturing the space being vacated by China, two major factors are holding India back, logistics and labour laws. India’s labour laws essentially ensure that Indian firms continue to remain small and in the process they lack economies of scale to compete internationally.

As the Economic Survey points out: “One symptom of labour market problems is that Indian apparel and leather firms are smaller compared to firms in say China, Bangladesh and Vietnam. An estimated 78 per cent of firms in India employ less than 50 workers with 10 per cent employing more than 500. In China, the comparable numbers are about 15 per cent and 28 per cent respectively.”

Take a look at Figure 3. It shows the logistic costs of different countries. India comes right at the bottom. In fact, the logistics cost of India and Vietnam is the same. Nevertheless, it takes lesser time to deliver stuff from Vietnam to the US East Coast, than it takes from India. This works in favour of Vietnam.

Figure 3:To conclude, the window of opportunity to capture the space being vacated by China is narrowing. And India needs to get its act right quickly, if it wants to capture the space being vacated.

The column was originally published on Equitymaster on February 22, 2017

India’s Economic Growth and the Power of Compounding

discount-10

On August 2, 2016, I had talked about a bungalow on the posh Nepean Sea Road in Mumbai, being up for sale.

The bungalow was last sold in 1917, at a price of over Rs 1 lakh.  Further, similar properties in the vicinity in the recent past had been sold for Rs 400 crore, or so, The Times of India reported.

Essentially, something that was bought for around Rs 1 lakh, 99 years back, is now expected to be sold for around Rs 400 crore.

This works out to a return of 11.3 per cent per year.

How how much would have the bungalow been worth now in 2016, if the rate of return had been just 30 basis points lower, at 11 per cent per year? One basis point is one hundredth of a percentage.

Would like to take a guess, dear reader?

Rs 395 crore? Or Rs 375 crore? Or even lower than that?

In fact, the answer will surprise you.

At a return of 11 per cent per year, the bungalow would have been worth around Rs 306.9 crore, or almost Rs 93.1 crore lower.

This would mean that the bungalow would be worth 23.3 per cent lower in comparison to Rs 400 crore.

And how much would the bungalow be worth at a return of 10.5 per cent per year? Would you like to take a guess?

Actually let me not prolong the agony. At 10.5 per cent per year, the bungalow would have been worth around Rs 196.3 crore. This is less than half of Rs 400 crore. Hence, a fall in return of 80 basis points per year, wipes off the value by more than half, over a 99-year period.

And how much would the bungalow be worth at 10 per cent per year? Rs 125.3 crore. This is around 68.7 per cent lower than Rs 400 crore.

So what is the point I am trying to make here? This is what the power of compounding can do. Even a small difference in return over a long period of time can make a huge difference to the amount of corpus you end up accumulating.

Of course, a normal person who is trying to accumulate wealth does not invest over a 100-year time frame. And further, even if he or she did, there is no way of knowing in advance what strategy would work best, over such a longish period of time.

Nevertheless, this piece is not about which is the best investment strategy in the long run. It is about the fact that what applies to investment returns also applies to the economic growth rate. Even a small difference in the annual economic growth rate over a longish period of time, can have a huge impact on how a country eventually turns out to be.

As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “The ‘power of compound interest’ over long periods is such that even a small change in the growth rate of per capita income makes a big difference to eventual income per head.”

And how do things look for India? Where would it end by 2040 at different rates of economic growth? As Joshi writes: “At a growth rate of 3 per cent a year, income per head would double, and reach about the same level as China’s per capita income today. At a growth rate of 6 per cent a year, income per head would quadruple to a level around that enjoyed by Chile, Malaysia and Poland today. If income per head grew at 9 per cent a year, it would increase nearly eight-fold, and India would have a per capita income comparable to an average high-income country of today.”

The question is what will make India a prosperous country. How do we define prosperity? As Joshi writes: “At a first pass, it could be defined as the level of per capita income enjoyed by the lower rung of high-income countries today, with the rider that national income should be widely shared and even the poorest people should have decent standards of living. To reach the said goal, India would require high-quality per-capita growth of income of around 7 per cent a year for a period of twenty-four years, from 2016.”

 The trouble is that there is almost no track record of any country (except China) growing at a rapid rate of 7 per cent per year, for a very long period of time, which is what India needs to achieve if it has to be prosperous.

When it comes to superfast growth China grew by 8.1 per cent per year between 1977 and 2010. Only two other countries came anywhere near. As Lant Pritchett and Lawrence H. Summers write in a research paper titled Asiaphoria Meets Regression to the Mean: “There are essentially only two countries with episodes even close to China’s current duration. Taiwan had a growth episode from 1962 to 1994 of 6.8 per cent (decelerating to growth of 3.5 percent from 1994 to 2010). Korea had an episode from 1962 to 1982 followed by another acceleration in 1982 until 1991 when growth decelerated to 4.48 percent—a total of 29 years of super-rapid growth (>6 per cent)—followed by still rapid (>4 per cent) growth. So, China’s experience from 1977 to 2010 already holds the distinction of being the only instance, quite possibly in the history of mankind, but certainly in the data, with a sustained episode of super-rapid (> 6 per cent per annum) growth for more than 32 years.”

Hence, the odds are stacked against India. And it will mean the governments doing many things right in the years to come, if the country has to get anywhere near a sustained growth rate of 7 per cent or more, for a longish period of time.

The trouble though is that most policymakers seem to take a growth rate of 7 to 8 per cent as a given, in their calculations, even though history shows otherwise.

The column originally appeared in Vivek Kaul’s Diary on August 18, 2016