Why Bangladesh and India’s per capita GDP should not be compared
The latest report on World Economic Outlook by the International Monetary Fund (IMF) published in October 2020 has created a lot of noise both in Bangladesh and India. To recap, the IMF has projected that in 2020 per capita GDP of Bangladesh will be USD 1,887.97 at current prices. India will have a per capita GDP of USD 1,877 in 2020. These changes in the respective economies will be due to a 3.8 percent increase in Bangladesh's GDP and 10.3 percent decline in India's GDP in 2020.
The IMF outlook also indicates that in 2021 India will see a rise of its per capita GDP by 8.8 percent while Bangladesh will see a rise of 4.4 percent. As a result, in 2021 India's per capita GDP will reach USD 2,030 and Bangladesh's USD 1,990. IMF's projection till 2025 indicates that in 2024 India will surpass Bangladesh and in 2025 Bangladesh will be ahead of India in terms of per capita GDP.
Reactions to these estimates have been divergent in both the countries. In Bangladesh, the government is understandably happy and proud of this accomplishment. Some analysists have credited the government for its efforts while many others have suggested it should do better by addressing existing challenges.
In India, a number of media outlets have lauded Bangladesh's achievement and suggested the Indian policymakers reflect on what went wrong in India and what worked for Bangladesh. Indian opposition political party saw it as the failure of the current Modi government. Many have blamed the weak management of Covid-19 which had a negative impact on the Indian economy.
Yet another group of Indian media was rather unkind in expressing their views on the IMF's projections. While interpreting the numbers, they stretched their words to undermine Bangladesh's achievement. They referred to non-compliance in the readymade garments (RMG) industry, violent political confrontation, corruption and Islamic radicalism.
But not all of it is correct. Also, these are not unique to Bangladesh.
Many countries around the world which have much higher incomes than Bangladesh are facing various types of limitations. Political violence and corruption are typical to all least developed and developing countries including the South Asian countries. During the last several years, Bangladesh's RMG entrepreneurs have been working hard to improve compliance and have been successful in earning buyers' confidence by doing so. The current government of Bangladesh has been strong-handedly controlling Islamic radicalism in the country after a few incidents. One should not forget that this is a global problem and therefore, without global effort it is not possible to root out religious extremism.
For both countries, there is no reason to overreact to these projections on per capita GDP for a number of reasons. First, using GDP as an indication of achievement has been criticised by economists for long. The very method of calculating GDP is flawed and it fails to show the real health of the economy. To avoid repetition, I am not discussing those here. But readers may refer to my earlier pieces on this topic ("Our incomprehensible obsession with GDP", May 19, 2019 and "Bangladesh's GDP growth number does not hold water", August 17, 2020). Second, comparing nominal GDP of one country with another is not correct. One dollar does not have the same value across countries. For example, one dollar in Bangladesh will not buy the same amount of goods and services in another country. The cost of living varies from country to country. That is why GDP based on purchasing power parity (PPP) is used while making GDP comparisons among countries, instead of nominal GDP. Hence in terms of PPP based per capita GDP India is still ahead of Bangladesh. India's per capita GDP at PPP is USD 6,284 and Bangladesh's USD 5,139.
Third, these GDP numbers are only projections and they keep changing as economic performance changes. Sometimes they change radically due to circumstances beyond our control. Who could predict that the world economy would struggle to survive in 2020? Who could foresee the deadly coronavirus pandemic coming? Haven't all projections made last year been revised?
Fourth, feeling competitive with neighbours is politically unhealthy. India is the largest democracy in the world. It is a much larger economy than Bangladesh. Still, having economically stronger neighbours is good for India. Higher purchasing power of Bangladeshi people will create higher demand for Indian goods and services. This will in turn increase India's export income from Bangladesh. Medical tourism to India by Bangladeshi patients is increasing every year. A large number of Bangladeshi students are also pursuing education in India. As a big neighbour India's responsibility also lies in working towards removing tariff and non-tariff trade barriers for Bangladeshi products. Water sharing is a long-standing agenda to be resolved between the two neighbouring countries.
For Bangladesh, higher per capita GDP than India is a noteworthy achievement indeed. India is a developing country while Bangladesh is still a least developed country (LDC). Bangladesh has been experiencing steady and high growth over the last decade. At the same time, Bangladesh has been successful in reducing population growth since its independence through active interventions. This has helped increase its per capita income.
Even during the pandemic Bangladesh has been able to maintain positive growth. This has been possible due to bumper agricultural harvest, good exports and high remittances. Bangladesh's success in social indicators is also well known to the world. The country has been an impressive performer in achieving several Millennium Development Goals (MDGs). In continuation to the MDG achievements, Bangladesh is committed to implementing the Sustainable Development Goals (SDGs). By achieving higher per capita gross national income, and meeting the human assets index and the economic vulnerability index of the United Nations, Bangladesh has also fulfilled all three criteria to graduate from an LDC to a developing country by 2024. Also, in 2018 Bangladesh achieved the status of a lower middle-income country graduating from a low-income country, according to World Bank's classification criteria.
However, Bangladesh should not be complacent about the projections of per capita GDP. Despite high growth, various weaknesses within the economy are obvious. Low revenue generation and investment are major challenges. The IMF report also mentions that Bangladesh's revenue-GDP ratio will be only 8.17 which is the lowest among South Asian countries. Due to low revenue generation the government has limited expenditure capacity. Total government expenditure is also lowest in South Asia and stands at only 14.97 percent of GDP. Investment-GDP ratio is 27.73 percent, much lower than Nepal and Bhutan and close to India (27.77 percent). As a result, the economy is constrained when it comes to creating adequate employment. High growth has not been able to reduce inequality. Strong measures are needed to improve governance and establish rule of law. Institutional reform to improve transparency and efficiency is still an unfinished agenda.
Therefore, the next step for Bangladesh is to work on its weaknesses to enhance and sustain its growth momentum and make growth inclusive and equitable.
Dr Fahmida Khatun is the Executive Director at the Centre for Policy Dialogue. The views expressed in this article are those of the author and do not necessarily reflect the position of her organisation.