Three-Track India

INDIA IS NOW OFFICIALLY recognised as the world’s fifth largest economy, ahead of Britain and France and just behind Japan (no. 3) and Germany (no. 4). At their current respective GDP growth rates, India will overtake Germany in 2026 and Japan in 2030 to become the world’s third largest economy after the United States and China.

But there are troubling caveats. India is the poorest nation among the top three. Its per capita income at current exchange rates is just under $2,500. Per capita income in the US is $65,000. In China it is $12,000.

The number of absolute poor in India has declined gradually over the decades. In 1947, the number was over 80 per cent. In 2022, several surveys put the figure at around 10 per cent though there are wide variations.

High average annual GDP growth of around seven per cent over the past 20 years has created in effect three Indias. At the top is a thin slice of perhaps 100 million Indians comprising less than 10 per cent of India’s population with a per capita income at current exchange rates that is in the range of $15,000 (Rs 12 lakh) a year. That places them in the category of mid-income countries in Latin America and parts of Southeast Asia.

The contribution of this thin slice of relatively affluent Indians to total GDP (100 million x $15,000) is roughly $1.50 trillion. They will thus contribute over 40 per cent to India’s estimated total GDP of $3.60 trillion in 2022-23.

This lies at the heart of India’s income inequality. Those at the top of the pyramid are relatively rich. The rest are relatively poor. But there is a slice in the middle of the two extremes: the aspirational middle-class. Its per capita income of around $5,000 at current exchange rates is double India’s average per capita income of $2,500. The middle rung comprises approximately 200 million Indians. Their contribution to total GDP (200 million x $5,000) is $1 trillion.