IMF Prediction: Higher Economic Growth of Bangladesh Compared to India

Context

IMF predicts, India is set to drop below Bangladesh in terms of per capita Gross Domestic Product (GDP) as the economy is projected to contract by a massive 10.3 percent this year.

Background

India, the fastest growing major economy, is seen as the powerhouse of South Asia, but this may soon change. The International Monetary Fund’s latest World Economic Outlook published last week has triggered much outrage in India. The provocation was the IMF’s prediction that Bangladesh’s per capita GDP will overtake that of India this year. The projected difference is rather small $1,888 to $1,877 and unlikely to last beyond this year.

India’s Economy at Present

In India, high oil prices, weak exports and depreciation of the rupee due to a slowdown in capital flows have impacted the economy. Recently, the rupee, Asia’s worst performing currency this year, fell to a historic low of 74/$.

Further 8.2 per cent economic growth rate in the first quarter of this fiscal and that was largely due to the base effect of the previous year but in the next quarters, figures are likely to see a sort of slowing down of growth.

What’s helped Bangladesh

Experts say that Bangladesh owes much of this progress to efforts made by non-government organisations like Grameen Bank and BRAC.

Grameen Bank, for one, is a globally renowned microfinance initiative that earned its founder Muhammad Yunus a Nobel Peace Prize and inspired replicas in more than 100 countries.

The initiative aims at poverty alleviation by giving loans to small-scale entrepreneurs who do not qualify to receive traditional bank loans. According to the bank’s website, it has “grown to provide collateral-free loans to 7.5 million clients, approximately 97 per cent of whom are women.

This has helped boost financial inclusion in the country. According to World Bank data, 34.1 per cent of Bangladeshi adults with bank accounts made digital transactions in 2017, against the average of 28.8 per cent for South Asia.

Although Bangladesh’s health expenditure as a share of GDP is still lower than India’s, several initiatives taken by the government have helped boost education and women empowerment.

The government has made primary education free and compulsory, giving girl students stipends and scholarships for their entire school education. The government has a strong social safety net for women with initiatives such as four to six months of paid maternity leave, and allowances for divorced and destitute women.

Women now make up nearly 70 per cent of Bangladesh’s garment industry and over 60 per cent of fish farmers.

Bangladesh has set an example for developing economies with its women empowerment initiatives, with the World Economic Forum (WEF) ranking the country number one in gender equality among south Asian nations in 2017 as well as 2016.

It has also registered an impressive performance on reducing poverty, a parameter on which India has made significant advances as well.

Bangladesh was ranked seventh, a good eight slots ahead of India (15), in the political representation of women on the WEF gender gap index.

Regional Implications and Consequences

There are many reasons for anxiety about India’s economic slowdown in recent years. But in using Dhaka’s impressive economic performance, India is missing the bigger story about the strategic consequences of Bangladesh’s economic rise.

International development institutions are convinced that the rest of the subcontinent and developing countries around the world can learn much from Dhaka’s experience, which they called the “Bangladesh model”. Our focus here is different. It is about the regional implications of Bangladesh’s economic success five of them stand out.

First, the rapid and sustained economic growth in Bangladesh has begun to alter the world’s mental maps of the subcontinent. Over the last five decades and more, in South Asia, India has been a nation of global interest. The other countries were generally described as the smaller states of the region. Bangladesh was never really small, its population today stands at about 160 million. It is demographically the eighth-largest nation in the world.

Second, the changing economic weights of Bangladesh and Pakistan in South Asia. This year, Bangladesh’s GDP is expected to reach about $320 billion, the IMF did not have the 2020 numbers from Pakistan to report but in 2019, Pakistan’s economy was at $275 billion. The growing economic muscle will help Dhaka steadily accumulate geopolitical salience in the years ahead.

Third, Bangladesh’s economic growth can accelerate regional integration in the eastern subcontinent. The region’s prospects for a collective economic advance are rather dim. Pakistan’s opposition to economic cooperation with India and its support for cross-border terror, the main regional forum for the subcontinent, the South Asian Association for Regional Cooperation (Saarc), is in a coma.

Instead of merely praying for the revival of Saarc, Delhi could usefully focus on promoting regionalism among Bangladesh, Bhutan, India and Nepal. The BBIN sub-regional forum involving the four, activated in the middle of last decade and has not advanced fast enough. It is time for Delhi and Dhaka to take a fresh look at the forum and find ways to widen the scope and pace of BBIN activity. Meanwhile, there is growing interest in Bhutan and Nepal for economic integration with Bangladesh.

Fourth, the economic success of Bangladesh is drawing attention from a range of countries in East Asia, including China, Japan, South Korea, and Singapore. The US, which traditionally focused on India and Pakistan, has woken up to the possibilities in Bangladesh. That the US Deputy Secretary of State, Stephen Biegun, travelled last week from Delhi to Dhaka rather than Rawalpindi, says something about Washington’s changing South Asian perspective.

Finally, the economic rise of Bangladesh could boost India’s national plans to accelerate the development of its eastern and northeastern states. Considering the fact that the Bangladesh’s economy is now one-and-a-half times as large as that of West Bengal, so better integration between the two would provide a huge boost for eastern India. So would connectivity between India’s landlocked Northeast and Bangladesh.

Otherside Views

Former chief economic adviser Arvind Subramanian said that GDP per capita is an estimate for one indicator of the average standard of welfare in a country. On more appropriate economic metric, Bangladesh has not surpassed India and is unlikely to be in future.

Government sources had emphasised that India's Gross Domestic Product (GDP) in terms of purchasing power parity was 11 times more than that of Bangladesh in 2019, hence the wrong numbers being compared.

He said all the focus has been on comparisons based on GDP measured at current, market exchange rates and this yields conclusion of Bangladesh eclipsing India. But market exchange rates are not appropriate for welfare comparisons across time and countries, adding that GDP per capita is an estimate for one indicator of the average standard of living/welfare in a country.

He said that there is need to measure real GDP in local currency after taking out effects of inflation and then, convert all local currency estimates of real GDP into comparable dollars. He noted that more appropriate basis is GDP at constant, purchasing power parity (PPP) exchange rates.

Conclusion

IMF's forecast for India shows a huge downward revision from its previous prediction in June, is also the biggest contraction projected among major emerging markets amid the COVID-19 pandemic.

An economic expert suggest that, if India wants to keep up with its neighbour, it should focus on reducing bottlenecks in sectors such as infrastructure, manufacturing, services and exports, which are critical to quality job creation. The export engine, along with investment, needs to be fired to sustain high growth rate.

However, India is likely to bounce back with an impressive 8.8 per cent growth rate in 2021, thus regaining the position of the fastest growing emerging economy, surpassing China's projected growth rate of 8.2 per cent.

Connecting the Article:

Question for Prelims

World Economic Outlook report is released by

(a) World Bank
(b) IMF
(c) OECD
(d) World Economic Forum

Question for Mains

What are the major causes of economic decline of India's growth trajectory ? How economic shortfall is detrimental to the country's growth ?