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July 08, 2005

India ranks 4th on global rich list


As the G-8 meet in Gleneagles, there’s a question increasingly doing the rounds: what is the relevance of the group? It was supposed to be a group of the world’s largest and most powerful economies. The plain truth is, it no longer is.

Look at it whichever way you will, the US, Japan, Germany, UK, France, Italy, Canada and Russia are simply not the biggest economies. Nor can anyone today suggest that China can be left out of any list of the most powerful economies.

If economies are ranked by sheer size, China would be second only to the US and India would come in at No. 4, one place behind Japan and ahead of Germany. How? That’s because the sizes of economies are no longer measured by converting their GDP into US dollars at the prevailing exchange rates. Instead, we have what is called the purchasing power parity (PPP) rate that is used by institutions like the International Monetary Fund (IMF) and the World Bank to compare GDPs of different countries. What the PPP method does is to recognise that exchange rates do not properly represent what different currencies can buy in their own home economies and hence distort the picture when we are comparing sizes across countries.

Exchange rates are determined essentially only by goods that are traded across borders.

They would not, therefore, take into account the fact that, say, a haircut in New Delhi or Mumbai may cost just Rs 50 while the same haircut in New York may cost around $20.

Now if India’s GDP were converted into dollars using the normal exchange rate, our barber’s contribution to GDP would be just over a dollar for each hair cut he provides while the New York barber would be weighing into the US economy at $20 per cut.

Using the PPP method, now globally acknowledged to be the most appropriate for such comparisons, China, India and Brazil would all be bigger than Russia and Canada, which are G-8 members. In fact, the Chinese economy alone is almost as big as those of Germany, UK, France and Italy put together. India has an economy that would comfortably outsize those of Russia and Canada put together.

You could argue, of course, that size alone is misleading and per capita GDP is a better indicator. If this were to be used as the criterion, it is true that China, India or Brazil would be nowhere in the picture, being ranked 95th, 120th and 67th respectively in terms of per capita income. However, you would then have to explain why Luxembourg and Norway, the countries with the highest per capita incomes, are not a part of the list. Ireland-ranked 4th just behind the US-Iceland, Denmark, Switzerland, Austria and Belgium, may also legitimately ask what other European countries ranked below them (that includes everyone in the group) are doing in the G-8.

To return to the size issue, if ten-year average growth rates estimated by the IMF for 1997-2006 are extrapolated over the next few years, India would catch up with Japan in just three years and overtake it in four years, while China would become the world’s biggest economy by 2014, overtaking the US.

July 8, 2005 in Reality, World News | Permalink


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Posted by: Chirayu | Jul 12, 2005 1:25:19 AM

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