The World Bank currently describes India as a lower middle income country. The average income of an Indian in 2020 was $1,935. The International Monetary Fund (IMF) now forecasts that number to rise to $3,769 in 2027, the latest year for which the multilateral lender publishes its forecast, which was recently redrawn after the Indian government. pointed out some discrepancies in its calculations. This means that per capita income in India is expected to cross $4,000 by the end of the decade. According to the current definition used by the World Bank, India would thus be on the verge of becoming an upper middle income country.
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How long has it taken other countries to double their per capita income from $2,000 to $4,000? The attached table provides data from some comparable Asian countries that have traveled since 1980 and some are on the verge of doing so. China, Taiwan and South Korea clearly maintained the fast pace of economic transformation when they were largely at our current level of development. Thailand, the Philippines, Indonesia and Malaysia took more than a decade. India is on track to double its income at the rate that Sri Lanka and Vietnam maintained.
For any country, the average income in US dollars depends on a combination of nominal economic growth in its domestic currency and the exchange rate of that currency against the dollar. Then how both go matters. China appreciated its currency in four short years to the point that its average income doubled to $4,000. Thailand saw its currency decline in the second half of 1997. Such sharp fluctuations in exchange rates undoubtedly affect the conversion of nominal average income calculated in terms of national currencies to a common measure such as the US dollar.
However, no country will see a rapid increase or decrease in its standard of living over a long period of time depending on the international value of its currency or fluctuations in domestic prices. This is because exchange rates ultimately reflect the inflation differential between different countries, so a country with high inflation will lose its exchange rate over a fairly long period of time, and vice versa. Much depends on the rate at which economic output is growing in real terms, or after taking apart the effects of inflation.
Two of the native Asian tigers—Taiwan and South Korea—as well as China are good examples. They can successfully double their average income in US dollar terms in six, five and four years respectively. Others took longer. Why these three countries can run ahead, while comparable countries with similar structural characteristics and economic policies cannot, is one of the great debates in development economics. The average time taken in this small sample is 10 years, which, according to current estimates, is close to what India needs to reach a per capita income of $4,000.
There is another factor to consider: the state of the world economy, especially since export growth was such a large part of the economic strategy of successful Asian economies when they were in the early stages of their economic transformation. But global economic growth is not a major influence. A quick and perhaps simplified look at the data reveals a negative correlation between the number of years it took a country to double its income in US dollars and the pace of expansion of the world economy over the relevant time period for each. Is. Country.
In other words, a country is more likely to quickly double its average income when the world economy is also doing well. However, this negative correlation is the weak, not the dominant interpretation (r-squared is 0.1203). This is a continuation of the rapid domestic growth that has been sustained for a long time.
In its new report on currency and finance, released a few weeks ago, the Reserve Bank of India has estimated that India may sustain an economic growth rate between 6.5% and 8.5% in the medium term. Rapid growth is needed not only to elevate our position in the international rankings, but also to provide economic opportunities to the young population, especially given our failure to generate quality jobs in productive enterprises. There are also setbacks to consider. Indian production is still below where this pandemic would not have occurred, and is expected to remain below trend for perhaps another decade. (Note: This is about the level of production rather than its rate of growth.) A climate shock is on the horizon.
India may narrow its income gap with countries such as the Philippines and Sri Lanka in this decade, especially given its ongoing economic tragedy. India will need more time to bridge the income gap with most of the other countries considered here. A lot will depend on whether we move near the low or high end of the expected growth forecast made by our central bank.
Chetan Sinha assisted with research input for this column.
Niranjan Rajadhyaksha is CEO and Senior Fellow at Earth India Research Advisors, and a member of the Academic Advisory Board of the Meghnad Desai Academy of Economics.