Is Indian economy size $2 Trillion or $8 Trillion?

That is a $6 Trillion question!

GDP1According to World bank data, Indian economy crossed $2 Trillion in 2014. But Prime Minister Narendra Modi in his recent US trip said, ‘We are  $8 Trillion economy today my dream for India is making India a $20 Trillion (roughly Rs. 13,23,27,000 crores) economy’. Astonished?

When I heard this statement, i first checked the year on my mobile and computer, both are showing 2015. I thought may be I missed 10 to 15 years over night :-) . Even at a better than expected GDP growth rate of 8 to 10%, it will take India at least 10 years to become a $8 trillion economy. so what is the catch? Is it an Oxymoron?

You will be surprised to know that both statements are accurate, to know how, you need to understand the term Purchasing Power parity.

image (20)There are two ways to measure GDP, one way is nominal GDP, which is an absolute measure, The second way is GDP at Purchasing Power Parity (PPP), is a relative measure.
India Economy is the seventh largest in the world by nominal GDP($2.308 Trillion)and third largest by purchasing power parity ($ 8.027 Trillion). So our Prime minister was referring to the later measure(relative) of economy, when he said we are $8 Trillion economy.

image (14)In simple terms, nominal GDP of $2 Trillion suggests that one economy produced $2 Trillion worth of goods and services over the course of a year, but it neither gives any indication of GDP per capita nor standard of living in the country. GDP (PPP) takes the costs of living into account. This explains why GDP (PPP) is used to measure the quality of life in a country. Purchasing power parity is used worldwide to compare the income levels in different countries. PPP thus makes it easy to understand and interpret the data of each country.

image (15)For example if you assume GDP per capita is $1000 in India and $2000 in Finland, that does not mean an average person is 2 times richer in Finland than India. When you measure economy in PPP terms, you compare what $1000 can buy you in India and $2000 can buy you in Finland? To illustrate further If we consider renting a 2BHK house and basket of grocery(Rice, wheat, vegetables etc) as two examples of service and goods. If it costs $100 to rent 2BHK and $100 for a basket of groceries in India,In Finland if it costs $1000 to rent 2BHK and $200 for a basket of grocery. It is more affordable to live in India with $1000 income then to live in Finland with $2000 income, mainly because real estate is relatively expensive in Finland and it comprises 50% of income. To arrive at the actual PPP figures, this data is calculated based on the basket of goods defined by global standards .w_pg1 Therefore, even if a country has a higher GDP per capita (individual income), that country’s people may still live poorer if the cost of living is more expensive.

Some interesting facts about. Indian Economy

  • One of the G-20 major Economics and a member of BRICS.
  • Approximate 9% growth rate for last two decades.
  • India became the world’s fastest growing major Economy from the last quarter of 2014. Replacing people’s republic of China.
  • Based on the latest IMF data, India’s Forex reserves at $350 Billion, stand 9th in the world, number one being China with $3.6 Trillion.
  • GDP of India increased from $1 Trillion in 2007 to $2 Trillion in 2014.

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