The International Monetary Fund released its semi-annual World Economic Outlook this month with a grim warning that while the world economy is reviving, the rise will be “long, uneven and uncertain.” However, the report made headlines for a very different reason in India. The database published with the report showed that India’s projected GDP per capita will fall below that of Bangladesh in 2020. Figures show that the Covid-19 crisis has hit the Indian economy much harder than Bangladesh in terms of increase. But even before the pandemic, the latter had maintained a much more stable growth rate over the past decade with its focus on exports of low-skilled labor. Therefore, it was inevitable that the Bangladeshi economy would catch up with India in per capita terms.
The IMF projections, however, need to be understood in greater detail to get a clearer picture. The problem centers on the IMF’s projections for GDP per capita at current prices for 2020, which is $ 1,887.97 for Bangladesh and $ 1,876.53 for India. The same projections for 2021 place India again above Bangladesh. The interesting thing to note is that the GDP per capita projections for India for 2019 stood at $ 2,097.78, while for Bangladesh they stood at $ 1,816.04. The Covid-19 hit to India has therefore been quite significant but almost non-existent for its subcontinental neighbor. This difference is also reflected in the Covid-19 numbers. Currently, India has 5,534 cases per million people compared to 2,380 in Bangladesh. Economic arguments aside, India can draw lessons from Bangladesh on its relative resilience to the pandemic.
But going back to the growth figures, it should first be noted that GDP per capita at current prices is not the best metric to compare between countries, as it does not eliminate the effects of inflation. A country with higher inflation could show higher GDP per capita at current prices, although citizens of the country can buy a smaller basket of products with the same amount of money. For this reason, GDP at constant prices based on purchasing power parity is a more reliable metric. According to IMF projections in the same database, India’s GDP per capita at constant prices is $ 5,944.69, while for Bangladesh it is $ 4,861.45. Therefore, in real terms, India still outshines Bangladesh.
However, these facts should not be cause for complacency, as there is much to learn from Bangladesh’s growth story. India’s GDP per capita in real terms was 1.4 times that of Bangladesh in 2016, but has been declining every year since then. As of 2020, projections place the ratio at 1.2. Furthermore, in terms of overall GDP (at current prices), India’s economy was 14.8 times that of Bangladesh in 2010. As of 2020, the ratio has dropped to 8.15. Thus, the previous decade has been worrying for the Indian economy. Even if Bangladesh cannot outperform India in real terms in the short term, significant lessons can be drawn from the country’s performance in recent years.
Bangladesh has followed the handbook adopted by the East Asian and Chinese economies that led to their exceptional growth trajectories over the past five decades. It has taken advantage of its low-skilled workforce and developed export competition for labor-intensive products such as textiles. Vietnam has also followed a similar strategy and, together with Bangladesh, are capturing most of the industries that are coming out of China. One of the main advantages of focusing on low-skilled labor for developing countries is that labor-intensive employment absorbs a significant part of the expanding labor force and reduces dependence on agriculture.
India has taken a different path to growth. Instead of low-skilled manufacturing jobs, the service sector has emerged as the country’s economic powerhouse due to its pool of skilled English-speaking workforce. In the process, India lost its bus as it became a manufacturing-driven economy. The downside of this path is that the service sector is not labor intensive and therefore does not create jobs at a commensurate rate when people enter the workforce in a developing economy. The result is unemployment and skills mismatch, which India is experiencing heavily. In a working paper by Prateek Kukreja, the 68th round of the NSS Employment and Unemployment Survey is used to show that the proportion of over-educated workers in jobs is drastically high in Indian manufacturing. In the textile and clothing industry, this figure stood at 68 percent in 2011-12. This shows how the Indian workforce is grossly underutilized and how significant economic benefits can be realized through proper and adequate job creation.
Bangladesh’s recent economic performance should be a wake-up call for India to focus on low-skilled production. The need of the moment is to allow the creation of industries that provide massive employment. To do so requires India to ignite its manufacturing cylinder and only then will it be able to outpace the growth of its peers in the neighborhood and beyond.
Amit Kapoor is president of the Indian Institute for Competitiveness and a visiting professor at Stanford University. Chirag Yadav is Principal Investigator at the Institute for Competitiveness, India.
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