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October 15, 2020

Bangladesh might beat India in per capita GDP as per IMF Report

by CA Shivam Jaiswal in Corporate Law

Bangladesh might beat India in per capita GDP as per IMF Report

The Indian economy shrank 23.9% year-on-year in the second quarter of 2020, much worse than market forecasts of an 18.3% drop. It is the biggest contraction on record, as India imposed a coronavirus lockdown in late March and extended it several times, halting most economic activities. Still, India remained one of the worst-affected country in the world by the pandemic.

The gross domestic product (GDP) measures national income and output for a given country’s economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time. The Gross Domestic Product (GDP) in India was worth 2875.14 billion US dollars in 2019, according to official data from the World Bank and projections from Trading Economics. The GDP value of India represents 2.39% of the world economy.

The International Monetary Fund (IMF) released its World Economic Outlook Report where it stated that second quarter GDP was weaker than projected, for India, where domestic demand plunged following a very sharp compression in consumption and a collapse in investment. According to the IMF report, India is about to slip below Bangladesh in per capita gross domestic product in 2020 (calendar year) as a result of lockdown impact. In per capita GDP terms, India was significantly above Bangladesh until few years ago, but the gap has been substantially closed due to the latter’s rapidly-rising exports. Besides, during the intervening period, while India’s savings and investments remained lukewarm, the corresponding numbers for Bangladesh saw a sizeable surge.

What does the IMF Report project about India’s drop in GDP?

  • The IMF sees India’s per capita GDP (in dollar terms, at current prices) falling to $1,877 in 2020, a decline of 10.3%. For Bangladesh, the per capita GDP (in dollar terms, at current prices) is seen growing to $1,888, a rise of 4%.
  • If the IMF’s forecast is accurate, then that will leave India just ahead of Pakistan and Nepal in the regional GDP sweepstakes. It means that the other countries in South Asia such as Bhutan, Sri Lanka, Maldives and Bangladesh will be ahead of India.
  • The economies of Nepal and Bhutan are also expected to grow this year.
  • India’s projected contraction of 10.3% is going to be third sharpest fall in the world after Spain and Italy and will also be the starkest decline among developing nations and emerging economies
  • The data accompanying the report says that in 2020, the Indian economy is set to shrink the most since the 1990-91 crisis. India is likely to be the worst hit economy in South Asia after Sri Lanka.
  • Among the other countries in the BRICS group, Brazil’s economy will contract 5.8%, Russia 4.1%, South Africa 8% while China will grow 1.9%.
  • However, India, Asia’s third-largest economy, is likely to bounce back as the IMF report, foresees a sharp recovery for India in 2021, which will get India ahead of Bangladesh once again in per capita GDP.
  • As per the report’s projections, in 2021, per capita GDP in dollar terms for India is likely to grow 8.2%. For the same period, the projected number for Bangladesh is 5.4%. That will take India to $2,030 in per capita GDP in 2021 compared to $1,990 for Bangladesh.

Other GDP forecasts for India

  • IMF’s forecast for India is worse than Reserve Bank of India’s projection of 9.5% contraction for the full fiscal.
  • It is also dimmer than the forecast of World Bank which predicted a decline of 9.6%. In addition, the World Bank also said that the situation in India is ‘worse than ever’.

Some Other Points mentioned in the IMF Report:

  • The report also said global growth would contract by 4.4% this year and bounce back to 5.2% in 2021.In India inflation declined sharply in the initial stages of the pandemic, although it has since picked up by reflecting on the supply disruptions and a rise in food prices in the nation.
  • All emerging market and developing economy regions are expected to contract this year, including notably emerging Asia, where large economies, such as India and Indonesia, continue to try to bring the pandemic under control
  • Among debtor countries, smaller deficits are projected for India and the United Kingdom due to lower oil prices and weak domestic demand.
  • Competing with natural gas for electricity generation, coal has also experienced significant downward price pressure, although supply disruptions in South Africa and strong demand from Indian industrial buyers supported South African coal prices.
  • Today, the top five coal-consuming countries (China, India, United States, Russia, Japan) account for 76.7% of global coal consumption.
  • Strong domestic mining interests in large coal consumer and producer countries, including India, may further complicate and delay the phaseout of coal in major coal consumer-producer countries.
  • Moreover, countries that have recently, or not yet, seen per capita coal consumption peak (including China, India, and Indonesia) account for the lion’s share of global coal consumption, which will therefore take years to decline in the absence of significant policy actions.
  • Whereas advanced economies have historically contributed the lion’s share of emissions, China and India, as large and fast-growing emerging market economies, are significant emitters and are expected to continue to account for growing shares of carbon emissions.

When incomes fall sharply, individuals cut back consumption. When private consumption falls sharply, businesses stop investing. Since both of these are voluntary decisions, there is no way to force people to spend more and/or coerce businesses to invest more in the current scenario. The same logic holds for exports and imports as well. Under the circumstances, there is only one engine that can boost GDP and that is the government. Only when government spends more, can the economy revive in the short to medium term. If the government does not spend adequately enough then the economy will take a long time to recover.

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