5th largest economy? Yes, but also the most unequal

5th largest economy? Yes, but also the most unequal

It made headlines last week that India has overtaken its former colonial master, the United Kingdom, to become the world’s fifth largest economy. Surely this is cause for celebration. Or is it?

Being higher in the GDP ranking is obviously better than being lower, but that’s ceteris paribus, other things being equal. In this case, all other things are not equal. With a larger population, one can be higher in the ranking while citizens are, on average, poor, and even especially poor if population growth has outpaced economic growth. Moreover, while, again ceteris paribus, a larger pie is better than a smaller pie, the division of the pie may be marked by extreme inequality. Unfortunately, in India’s case, and perhaps inevitably, both conditions are true. As Ruchir Sharma recently pointed out, India began independence with the world’s sixth largest economy, fell to eleventh, and has since recovered to fifth.

Decline is certainly a cause for concern, because if one is falling relative to the rest of the world, and its population is growing, that means relative to the world, its citizens will become poorer. So the fact that we are on the rise implies that, since liberalization, we have fixed something in our system. In addition, there are public goods, defined as non-excludable and non-rivalrous goods, goods whose consumption by me does not diminish that of others, such as the military which, regardless of population size, can be better financed and will provide better security to all relative to the baseline. Another example is the fact that when government coffers are bigger, spending on infrastructure and other non-divisible items is bigger.

Of course, the larger the population, the more roads are needed, but it is not a proportional relationship. At a more fundamental level, however, the question is whether the life of the average person – or to use more current terminology – the aam aadmi, has improved. Here, one needs to be more circumspect in assessing the impact of being the fifth largest economy. First, our population growth is higher than that of the countries we have overtaken.


Moreover, growth in the West, unlike in, say, China, has been anemic. So even if our per capita income were stagnant, we would have eventually surpassed it in terms of GDP by virtue of population growth. A better comparison is perhaps with China, with whom we were at parity as late as 1990. Second, India’s growth since liberalization has been very uneven. According to the World Inequality Report 2022, India stands out as a “poor and highly unequal country with an affluent elite”, where the top 10% own 57% of total national income, while 50% lower is only 13%. %.

As is obvious, if the lion’s share of economic growth is captured by the largest income club, we can become the fifth largest economy in the world even when the aam aadmi stagnates or becomes relatively more poor This doesn’t have to be a reviewer for reviews. well, but to critically examine grandiose claims. A biased critic would claim that nothing has improved; a critical thinker would ask what has improved and to what extent and for whom. In the case of India, while the population has grown and income inequality has increased, it is also the case that poverty has fallen since liberalization.

According to a study by the Oxford Poverty and Human Development Initiative (OPHI), in collaboration with the United Nations Development Programme, more than 270 million Indians lifted themselves out of poverty between 2005 and 2016. Only one can imagine how many more people would have been lifted out of poverty if growth had been more equitable and population growth had been lower.

This is, of course, all very abstract and hypothetical. In practical terms, liberalization leads to high growth and greater inequality. This has been seen in every country in the world, from China, whose liberalization was even more successful than that of India, to Russia, which had only the inequality of liberalization of the years of Yeltsin and head of his growth. The Empirical Regularity of Economic Growth Simon Kuznets, who won a Nobel Prize in Economics in 1971, first established an increase in inequality. In the early stages of development, as new opportunities arise, the wealthiest take advantage of them best. At the same time, a large population of unskilled workers helps keep wages low.


Therefore, inequality increases. However, this tendency is unlikely to be an immutable feature of capitalist growth that cannot be moderated by the social and economic policies of certain governments. Bernie Sanders, for example, seems to be proof that even in the most advanced capitalist societies, movements for social justice and economic equity can make a difference.