India : The Third Largest Economy in the World

The English language, the tie, the Scotch Whisky, the GMT are few of the legacies of the Brits still going around te World. The British Pound Sterling once the most powerful is now well relegated. In similar manner with rise of USA came the American dollar, Hollywood, burgers, coke and Pepsi. These things have been dominating the World for long.

Till now for measuring Knowledge the Currency in use was English language and for Wealth the American dollar. Times are now changing.

With rapid expansion of economy, who is contributing more to workd economy USA, China, Germany, Japan or India? Everyone is aware of the ranking as indicated when Gross Domestic Product or the GDP is calculated in US Dollar terms. The rankings for 23 -24 are :

USA – 28,783 billion dollars

China – 18,536 billion dollars

Germany – 4,730 billion dollars

Japan – 4,112 billion dollar

India – 3,942 billion dollar

So American Economy is nearly seven times of Indian Economy. It must be the EL DORADO in every sense of the word, especially with just 28 % of the Indians and nearly three times in geographical size. We all know that it is not like that.

GDP is calculated as : GDP = Consumption ( of goods & Services ) + Investments + Total Govt expenditure + Net Export ( export – imports ). Thus GDP is obviously an essential indicator of Economy as it shows the overall economic activity, growth and health of economy. However the reality is very different from what appears at first glance.

Now each country has different social customs, food habits, climatic conditions and consumption patterns and standards. Thus in the USA per capita use of Tissue & Hygiene papers is 142.5 Kg, whereas in Japan it is 96.2 kg and in India it is only 28,2 kg only. This product alone leads to a difference of few billion dollars in the GDP because the cost of buying 142kg of Tissue paper in USD and buying 28kg in INR differ considerably.

Thus to get a get a more accurate picture we must take the same quantity of goods and services in both countries and then see what they cost in each local currency. So say a shoe of a particular brand costs 50 USD in the United States. In India, the same costs ₹1500. For a logical comparison, exchange rate becomes 50USD = 1500 INR or 1USD = 30 INR ( and not 1 USD = 85 INR as per the present currency exchange rate ). This logical conversion of two currency is called Purchasing Power Parity or PPP.

For a more accurate PPP One must evaluate the output values of various goods / services of various countries i.e., each country’s statistics must be transformed into a common currency. A basket of goods and services is therefore used to calculate the purchasing power parity of two currencies, such as rent, groceries, travel, entertainment, fuel, and clothing. This parity is done against an imaginary “ international dollar “.

When so calculated India’s purchasing power parity (PPP) is 22.45 local currency units (LCU) per international dollar i, wheras the official INR/USD exchange rate 83 rupees for the US dollar.

It indicates that in India, you just need ₹22.45 to purchase the same products that would cost $1 in the US, rather than ₹83 because living costs are cheaper. It means that with 1 dollar equivalent rupees in India, you could purchase 83 divided by 22, or 3.7 units of the same goods or services.

So Purchasing Power Parity (PPP), a well-known macroeconomic measure uses a “basket of products” technique to compare the currencies of different countries. Economists can compare productive capacity and living standards between countries using PPP. Gross Domestic Product (GDP) calculations can be adjusted to reflect PPP. In terms of purchasing power parity, India is the world’s third-largest economy. In PPP terms, the GDP ranking is as :

China – 35291 billion “ Current International dollar “

USA – 28781billion “ CID”

India -15372 billion “ CID”

Next we come to Per Capita Income. In PPP terms it is as under for the three countries:

USA – 85373 CID ( world ranking 8th )

China- 25015 CID ( world ranking 73)

India – 10310 CID ( world ranking 125 )

Thus it can be stated that India has a cheaper cost of living. In India, a similar number of goods can be purchased for a lower price than in the United States. Since 3.7 times more goods can be purchased by Indians, the 10310 in India is actually equal to 38147 CID in the USA.

With our economy growing at 8.2 % per annum, our GDP are likely to overtake USA by 2050 in USD terms and much before in PPP terms.