Purchasing Power Matters

INDIA MAY BE THE FIFTH largest economy in the world," mocked one well-known economist, "but we are one of the poorest nations on earth based on our per capita income of $2,650."

- Minhaz Merchant

The economist was right. But he didn't explain why historically India's per capita income has been so low. Nor did he reveal that, according to the International Monetary Fund (IMF), per capita income measured by purchasing power parity (PPP) is a more accurate measure for a nation's well-being than market exchange dollar rates.

Consider first the history. At Independence in 1947, according to ourworldindata.org, India had a per capita income of $60. That has risen in 2023 to $2,650. This is a rise of 45x in 76 years at a compound annual growth rate (CAGR) of five per cent.

During 190 years of British colonial rule, as Dr Shashi Tharoor, Professor Utsa Patnaik and others have pointed out, in books and academic journals, Indian per capita income stagnated. In 1700, an average Englishman's per capita income was roughly similar to the per capita income of the average Indian.

British colonialism impoverished India and enriched Britain. The level of poverty in India in 1947 was 80 per cent, literacy 12 per cent and life expectancy 32 years. It has taken three-quarters of a century to bring poverty down to less than 15 per cent, the literacy rate up to 79 per cent and life expectancy to 70 years. It is still a work in progress.

The Nehru government’s socialist policies ensured that while India prospered in relative terms to the British colonial period, per capita income grew far more slowly than in other newly independent countries like Singapore, Malaysia and Taiwan.

It was only after economic liberalisation in 1991 that India’s per capita income began to grow at its fastest pace in over 250 years.