Thoughts on GDP(PPP) of India

The gross domestic product of a country is the market value of all final goods and services produced in a country in a given period of time. It is used to measure the economic power of country.

According to the international monetary fund, China has a GDP of 2,234,133,000,000 USD which makes it the fourth largest economy in the world. India has a GDP of 771,951,000,000 USD which makes it the twelfth largest economy in the world.

How is it then, that the media hails China as the second largest economy in the world, and India as the fourth largest economy in the world? The answer is GDP(PPP) which adjusts the gross domestic product to account for the purchasing power of a country with respect to the purchasing power of USD. In other words, a basket of goods is cheaper in India than in USA, and the Gross Domestic Product based on Purchasing Power Parity [GDP(PPP)] accounts for this change. Thus although Indian people generate a lesser GDP, the people of India can have similar lifestyle as the people of USA with lesser money, hence making India a much stronger economy than it seems.

GDP(PPP) is a fairer way to look at the economic strength of country.

Some thoughts on the real situation about India:

  • Purchasing Power of a currency is reduced by inflation. For example, when I was a kid my mom used to give me 3 rupees to buy half a litre of milk, but the last time I checked half a litre of milk was around 10 rupees. So if I had put that 3 rupees in a piggy bank, I wouldn’t be able to buy what was worth 3 rupees then. This phenomena is called inflation. Inflation eats away the purchasing power of money.

    Inflation is self-sustaining in some ways. When people realize that it is not worth saving, they spend, but as more money is spend, buisnesses will find it profitable to charge more for the goods and services, and hence increase the prices of goods and reduce the value of a rupee.

    One of the ways Governments fight inflation by increasing interest rates, so that people will save more, and thus keep inflation under a check. Indian government has done just that, they have increased the interest rates 4 times last year to combat an inflation that made 100 rupees worth of goods in 1985 worth 497 rupees in the February of 2007, which made rupee cheaper in value. But the average ages of salaried employees is only 26.5 years who do not prefer to save money and live from paycheck to paycheck, thus they will keep aiding inflation.

    To make things even scarier, since 1960, 69% of the world’s market-oriented countries have suffered at least one year in which inflation ran at an annualized rate of 25% or more. On average, those inflationary periods destroyed 53% of purchasing power.(Source)

    Finally, rising prices allow the Indian Government to pay off her debts with rupees that have been cheapened by inflation. Completely eradicating inflation runs against the economic self-interest of any government that regularly borrows money.(Source: Laurence Siegel of Ford Foundation)

    SO high inflation rates in India are here to stay, which will eventually bring the Purchasing Power Parity down and thus making India weaker economy based on GDP(PPP). Personally, I think, once Manmohan Singh is gone, there will be a 69% chance that India may get hit by hyper-inflation at the rate of 25% per year based on the previously mentioned data.

  • My guess, based on the iPod index is that the basket of goods in consideration for adjusting the GDP of India based on purchasing power parity, contains only locally produced basic goods. If the basket of goods contains products of a quality comparable to that of US goods OR products that were produced in another country, the assumption that Indian people can have similar lifestyle with lesser money becomes invalid.

    With globalization becoming a trend in India, the assumption that the basket of goods will only contain locally produced goods can no longer be true. For the Indian people to have a similar lifestyle as in USA, they will have to buy better quality OR foreign goods for which they will have to pay more. Thus GDP adjusted for Purchasing Power Parity i.e. GDP(PPP) for India is lesser than it seems.

  • The actual GDP of India without adjusting for the Purchasing Power Parity of India is only a mere 34.5% of the GDP of China, and 6.1% of the GDP of USA. Thus although, India is the twelfth largest economy, it is because there are wide gaps in between the GDPs of countries. India still has a really long way to go to even have a GDP as that of China. The world cannot stop its growth just for India, it is a race with no end. Smaller countires like Brazil and South Korea have already overtaken India in terms of actual GDP.

    Even if the GDP of India is adjusted for the purchasing power parity(PPP), it is still only 38% of the GDP(PPP) of China.

  • It is rumored that, newly developed infrastructure in India is unplanned and will remain unmaintained after DBFO (Design, Build, Finance Operate) period is completed. e.g. While the diagonals of Golden Quadrilateral project remain incomplete, in February 2006, a 600 meter stretch of the highway connecting Kolkata to Chennai subsided into the ground, opening up ten meter gorges near Bally, West Bengal. This stretch had been completed a year back by a Malaysian multinational firm, selected after global tendering.


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