Monday, July 4, 2011

Gross Domestic Poverty

As posted on

For those of us with a memory of India in the 1980s and before there is no doubt at all that this is a country moving forward economically. From my schooldays when there were only two or three sub-standard brands of everything from soft drinks to soap to chocolate to cars, today’s India is remarkably different. It’s not just that there is every major brand available today. There is construction everywhere and sleek glass buildings are slowly but surely replacing old concrete structures. And there is a palpable feeling of change and a growing national pride. Incredible India. Every so often I get caught up in it and then I look at the numbers and I realize how easily we can distort our self-perception.

Here are the facts. India and China are often compared as the Asian giants, both with over a billion people. But China’s economy is three times as big as India’s – a GDP of 5 trillion US dollars compared to India’s meagre 1.4. According to the Global Language Monitor, The Rise of China has been the most frequent news story for over a decade across over 75000 print and electronic media publications. India doesn’t feature among even the top 20. For further perspective, Tokyo, which is the largest city economy in the world, has an economy the same size as India – 1.4 trillion. Tokyo has only 13 million people though, which means that they are pretty hard at work there. About a third of them are either kids or old folk which leaves about 8.5 million people out there getting it done each day, producing an output as large as our entire country.

Take a look at how GDP is calculated: India uses the expenditure method which is consumption + investment + (government spending) + (exports-imports). I’m most comfortable with the consumption and the export/import parts because I think people and businesses, especially in India, are pretty good at only buying and selling at prices they think reflect the value of the purchase or sale. The investment part is OK too but there is a bit of speculation about future productivity embedded in that. It’s the government spending that I would heavily discount. All the siphoned off money goes back into the economy as consumption I would think. But really, I can’t imagine that the government spend on the damn ditch outside my house that was dug for no apparent reason and never got filled back up was worth what they paid for it (sorry I got a little riled up there). And I’m pretty sure that like this, a large portion of the 27.2% of GDP that the Government expenditure accounts for, does not reflect any real productive value. So all in all, I’d peg the Indian economy as smaller than Tokyo's.

Japan as a whole isn’t nearly as productive as Tokyo though. Tokyo is 10% of Japan’s population but produces 30% of its output. Similarly, Los Angeles accounts for 40% of the economy of the US state of California, which is roughly the same physical area as Japan. That large cities are far more productive per capita is no mystery. The density of cities allows for all sorts of efficiencies. It’s a whole lot easier to be productive in a city where the ecosystem allows you to do things faster and more easily – from hopping on frequent public transportation to finding any product or service you need to get your job done. Urbanization has enormous economic benefit. On the other hand, I shudder to think what a single massive earthquake right in the middle of Tokyo or LA would do – and both are earthquake prone. Such a tight geographic concentration of productivity has its enormous benefits but immense risks. In India the GDP (for all its meagreness) is far more evenly distributed with 50% coming from its six major cities in a fairly even manner.

With 70% of our population in villages though, the challenge is to figure out how to enable circumstances of greater productivity for a distributed population. But just imagine, if every one of our working age population was as productive as the average Tokyoite, India’s economy would be 129 trillion, which is almost twice the entire world economy today.


  1. I think one has to be very careful while dealing with numbers of GDP and using it as a measure of quality of life or productivity.

    Let us consider two families- One in Bangalore and another, say,in Shimoga (A city in central Karnataka).
    If a family in Shimoga has an income of Rs 4 per Annum, they can lead reasonably comfortable life in that Tier-II city, and they can even think of buying a pretty good House of say 2 BHK with all modern facilities.

    And for family living in Bangalore, it would nearly be impossible to live at that level of comfort.
    In Bangalore, the costs of living are much higher, and income reflects higher costs.

    Tokyo is considered as one of costliest cities to live.

  2. Your point is well taken. I have used GDP as a measure of productivity and this is a little careless, technically speaking. I would argue that it is a reasonable approximation though and the larger point still holds.

    With respect to cost of living, what you pay for in a larger city is access to more opportunities and more choices and this would distort the direct relationship between GDP and productivity. Quality of life on the other hand is a highly subjective thing ...

  3. Well, I agree to your point that cost also includes price one will pay for opportunities. Suppose, the bread winner in Tier-II city, wants to start a business, It would be easy for him to make 1 crore in Bangalore than in that city where total wealth (GDP, if you wish) and the cash flow is much lesser.

    Also, I was reading your "Potential Money" article, it was really interesting. In a sense, I feel, money can be thought as construct of human intellect. A protocol, or a message. I will give you one example-
    Suppose you've to get some work to done. You call up someone.
    Then you can just tell him. He'll do it as a gesture of courtesy.
    Or you can threaten him. He'll do it.
    Or you can give him money.

    What I'm trying to tell you is, money, at the core, is involved in human interaction, and involves some transfer of message from one mind to another.