Gdp Per Capita

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Nishant U Wakare

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Table of Contents Sr.no. 1 2 3 4

Topic Page no. Introduction 2 Overview 6 Problems in 7 growth How it can be 8 improved

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GDP PER CAPITA Introduction : Output per head is a good guide to living standards. It implicitly allows for qualitative factors such as literacy or health, although these are not covered directly. It is a measure of output per person and calculated as Gross Domestic Product (GDP) divided by Population size. It is used as an indicator of overall economic welfare. The Indian economy has registered a highly impressive growth during fiscal 2005-06. Sustained manufacturing activity and impressive performance of the services sector with reasonable support from the recovery in agricultural activity have added greater momentum to this growth process. After recording some slowdown in the third quarter (October-December) of 200506, real gross domestic product (GDP) registered a sharp increase in the fourth quarter (January-March) of 2005-06 benefiting from a pick-up in almost all segments of agriculture, industry and services. According to the revised estimates released by the Central Statistical Organization (CSO) in May 2006, real GDP accelerated from 7.5 per cent in 2004-05 to 8.4 per cent during 2005-06. Indian real growth has risen from the 4 per cent average it had from the 1950s to the early 1980s to a current 6 per cent average (first graph). However, because population growth has fallen from 2.5 per cent a year to 1.5 per cent, GDP per head is now rising at 4.5 per cent instead of 1.5 per cent - an enormous improvement in living standards. Most recently there has been a sudden spurt in growth: In the third quarter of last year, it was an annualized 8.4 per cent. There has been a steady rise in the service sector since the early 1980s and particularly since the liberal reforms of the early 1990s. Manufacturing, apart from one or two particular segments such as motor components, has gone nowhere - partly because of ill-designed regulation but also because poor port and airport facilities make it hard to ship goods. Software, on the other hand, can be shipped over the wires; Indian exports have almost doubled as a percentage of GDP over the past two decades, and are currently

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running up some 25 per cent year-on-year. India now has a trade surplus with China. There is also, unsurprisingly, a long agenda of things needing attention. The fiscal-monetary mix needs to be rebalanced. The government deficit is around 5 per cent of GDP and has been around that level from most of the past 40 years. The deficit funds low-quality public investment as well as crowding out small investment. Meanwhile monetary policy is too tight, which makes it difficult and expensive for companies to borrow,and while progress has been made in deregulation, labour controls still inhibit hiring by private sector companies. There is a reasonable expectation that the 6 per cent growth rate can be sustained. Despite all the lapses of governance, the corruption, the destructive regulation and so on, some aspects of the Indian system function better than the country's east Asian neighbors. The banking system is solvent, with non-performing loans making only 4 per cent of GDP, against 41 per cent in China. There is the English language, a competence that will take China a generation to acquire, and the possibility of the creation of special economic zones, like China, with less rigorous labour and other regulation. With a GDP growth rate of 9.4% in 2006-07, the Indian economy is among the fastest growing in the world. India's GDP in terms of USD exchange rate is US$1,103 billion, which makes it the twelfth largest economy in the world. When measured in terms of purchasing power parity (PPP), India has the world's fourth largest GDP at US$4.156 trillion. India's per capita income (nominal) is $979, ranked 128th in the world, while its per capita (PPP) of US$3,700 is ranked 118th. The Indian economy has grown steadily over the last two decades; however, its growth has been uneven when comparing different social groups, economic groups, geographic regions, and rural and urban areas. Although income inequality in India is relatively small, it has been increasing of late. Despite significant economic progress, a quarter of the nation's population earns less than the government-specified poverty threshold of $0.40/day. In addition, India has a higher rate of malnutrition among children under the age of three (46% in year 2007) than any other country in the world. In 2006, estimated exports stood at US$112 billion and imports were around US$187.9 billion. Textiles, jewellery, engineering goods and software are major export commodities. Crude oil, machineries, fertilizers, and chemicals are major imports. India's most important trading partners are the United States, the European Union, China, and the United Arab Emirates. More 5

recently, India has capitalized on its large pool of educated, Englishspeaking people to become an important outsourcing destination for multinational corporations. India has also become a major exporter of software as well as financial, research, and technological services. Its natural resources include arable land, bauxite, chromites, coal (of which it has the fourth largest reserves in the world), diamonds, iron ore, limestone, manganese, mica, natural gas, petroleum, and titanium ore. Table 1: Growth of GDP and Major Sectors (% per year) Year

1951/5 21980/8 1 (1) 2.5

Agricult ure and Allied Industry 5.3

1981/8 21990/9 1 (2) 3.5

1992/9 31996/9 7 (3) 4.7

1997/98- 2002/0 2001/02 3(4) 2005/0 6 (5) 2.0 1.9

1992/9 32005/0 6 (6) 3.0

1981/8 22005/0 6 (7) 3.0

7.1

7.6

4.4

8.0

6.6

6.5

Services

4.5

6.7

7.6

8.2

8.9

8.2

7.4

GDP

3.6

5.6

6.7

5.5

7.0

6.4

5.9

GDP per 1.4 3.4 4.6 3.6 5.3 capita Source: CSO . Note: Industry includes Construction.

4.4

3.8

At the same time, one should not forget that the GDP growth rate of 3.6 percent was four times greater than the 0.9 percent growth estimated for the previous half century of pre- independence (Table 2). Moreover, the growth was reasonably sustained, with no extended periods of decline. Nor were there inflationary bouts of the kind that racked many countries in Latin America. However, growth was far below potential and much less than the 7-8 percent rates being achieved in some countries of East Asia and Latin America.

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Table 2: Economic Growth: Pre-independence (% per year) Year

1900-46

1900-29

1930-46

GDP

0.9

0.9

0.8

Population

0.8

0.5

1.3

Per Capita GDP

0.1

0.4

-0.5

The last thirty years’ experience suggests that very few developing countries have sustained decent per capita growth for two decades or more. Specifically, out of 117 developing countries with population over half a million, only 12 countries achieved per capita growth of more than 3 percent per year in 1980-2002, with at least 2 percent growth in each decade of the eighties and nineties. These twelve countries were: China (8.2), Vietnam (4.6), South Korea (6.1), Chile (3.3), Mauritius (4.4), Malaysia (3.4), India (3.6), Thailand (4.6), Bhutan (4.3), Sri Lanka (3.1), Botswana (4.7) and Indonesia (3.5). (The number falls to 9 if we specify a minimum population of 3 million). . The strength of the cycle could abate in the next couple of years and India’s growth could revert to a trend rate in the range of 6 to 7 percent, perhaps closer to the higher figure. Even then, under this “pessimistic” scenario, annual per capita growth would be at a historical peak for India (Table 3). Table 3 : Medium Term Growth Expectations 1992/3 – 2002/3 2005/6 -2006/7

GDP %

6.4

7.2 *

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2007/8 - 2011 /12 “Optimist”

“Pessimist ”

8 – 10

6.5 – 7.0

GDP per capita 4.4 5.5 6.5 – 8.5 5 – 5.5 (%) * Assuming Reserve Bank projection of 8.0 percent GDP growth for 2006/7 Perhaps the most noteworthy point is that medium-term growth expectations for India are so buoyant that the range between optimists and pessimists is placed so high, within a narrow band of about 7 to 9 percent. Only time will tell who is closer to being right.

Overview:India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, though two-thirds of the workforce is in agriculture. The existing government has committed to furthering economic reforms and developing basic infrastructure to improve the lives of the rural poor and boost economic performance. Government controls on foreign trade and investment have been reduced in some areas, but high tariffs (averaging 20% in 2004) and limits on foreign direct investment are still in place. The government has indicated it will do more to liberalize investment in civil aviation, telecom, and insurance sectors in the near term. Privatization of government-owned industries has proceeded slowly, and continues to generate political debate; continued social, political, and economic rigidities hold back needed initiatives. The economy has posted an excellent average growth rate of 6.8% since 1994, reducing poverty by about 10 percentage points. India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers. Despite strong growth, the World Bank and others worry about the combined state and federal budget deficit, running at approximately 9% of GDP. The huge and growing population is the fundamental social, economic, and environmental problem. GDP per capita is often used as an indicator of Standard of Living in an economy. While this approach has advantages, many criticisms of GDP focus on its use as a sole indicator of standard of living.

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The measure advantage to using GDP per capita as an indicator of standard of living are , that is measured frequently widely and consistently and in that technical definition used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country. The measure disadvantage of using GDP as an indicator of standard of living is that it is not, a measure of standard of living GDP is intended to be a measure of particular type of economic activity.

Problems in Growth •

We can be justifiably proud of the fact that the “rule of law” prevails in our country, and that even the mightiest are not above the law. The delays in the judicial process may be legendary, but there is a widespread respect for the “rule of law”. However, for historical reasons, it is also a fact that our legal system provides full protection to the private interests of the socalled “public servant”, often at the expense of the public that he or she is supposed to serve. In addition to complete job security, any group of public servants in any public sector organization can go on strike – hospitals, universities, schools, banks, buses, post offices, railways, municipalities - in search of higher wages, promotions and bonuses for themselves irrespective of the costs and inconvenience to the public (in whose name they have been appointed in the first place). Problems have only become worse over time and there is little or no accountability of the public servant to perform the public duty.

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The “authority” of Governments at, both Centre and States, to enforce their decisions has eroded over time. Governments can pass orders, for example, for relocation of unauthorized industrial units or other structures, but implementation can be delayed if they run counter to the private interests of some (at the expense of the general public interest). Similarly, Governments may decide to restructure public utilities to cut down waste or output losses, but these decisions do not necessarily have to be implemented if they adversely affect the interests of public servants employed in these organizations.

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Governments at different levels may announce plans and programmes to provide social services (such as, expand literacy), but these initiatives are unlikely to be implemented on the ground because of fiscal stringency. For example, in 1994, the Tenth Finance Commission projected a rate of growth in real terms of 2.5 per cent for expenditure on elementary 9

education up to the end of the century in respect of four States where the incidence of poverty and illiteracy was among the highest in the country. This projected rate of growth in expenditure was lower than the growth of population in the relevant age group, and grossly insufficient to cover new programmes of adult literates •

The process and procedures for conducting business in Government and public service organizations, over time have become non-functional. There are multiplicities of Departments involved in the simplest of decisions, and administrative rules generally concentrate on the process rather than results. There is very little decentralization of decisionmaking powers, particularly financial powers. Thus, while local authorities have been given significant authority in some States for implementing national programmes, their financial authority is limited. Transfers to local authorities for health spending, for example, average less than 15 per cent of State Government budgets.

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The multiplicity of functions and responsibilities placed upon illequipped and ill-trained staff in public offices and local institutions make it almost impossible to deliver services with any degree of efficiency, particularly in rural areas. For example, a “multi-purpose” female health worker is required to perform as many as forty-seven tasks to be undertaken on a regular basis!

How it can be improved? In order to overcome some of the problems that I mentioned above, we need to move on a number of fronts. We need legal reform to focus sharply on the interests of the public, and not those of the public servant, in the functioning of the governmental and public delivery systems. Clear mechanisms for establishing accountability for performance are essential, and all forms of special protection for persons working for Government or public sector agencies (except for armed forces or agencies engaged in maintenance of law and order) deserve to be eliminated. We need institutional reform, all public monopolies should be eliminated, and there should be no purchase preference for public sector enterprises or agencies. Government should be free to engage the services of non-governmental organizations or private service providers at competitive costs to ensure effective delivery of essential services. We need freedom of information and full disclosure of all

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financial decisions made by Governments and its multifarious agencies on a daily rather than quarterly or annual basis.

Bibliography www.finmin.nic.in • www.yahoo.com/finance •

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