India, the fastest-growing major economy, is seen as the powerhouse of South Asia, but this may soon change. Having already stolen a march over India on key social indices, small neighbour Bangladesh is now on the verge of establishing a lead on the economic front too.
- The recent debate in India-Bangladesh relations has erupted since the GDP projections by the International Monetary Fund this year.
- It has suddenly dawned upon the critics; media and expert commentators that Bangladesh has managed to build a thriving economy primarily dependent on export markets.
- Their economic success is being contrasted with the economic contraction in India due to the pandemic and lockdowns.
Centrestage of the debate: The economic comparison
- According to the IMF’s medium-term forecasts, Bangladesh’s per capita GDP is expected to overtake India’s this year.
- Over the five-year period ending in 2025, Bangladesh’s per capita GDP is expected to grow at a slightly higher pace.
- It implies that in 2025, it’s per capita income would be $2,756, marginally higher than that of India’s at $2,729.
Why it matters?
- Typically, countries are compared on the basis of GDP growth rate, or on absolute GDP.
- For the most part since Independence, on both these counts, India’s economy has been better than Bangladesh’s.
- However, per capita income also involves another variable — the overall population — and is arrived at by dividing the total GDP by the total population.
Why does India lag behind?
There are three reasons why India’s per capita income has fallen below Bangladesh this year:
- The first thing to note is that Bangladesh’s economy has been clocking rapid GDP growth rates since 2004.
- Secondly, over the same 15-year period, India’s population grew faster (around 21%) than Bangladesh’s population (just under 18%).
- Lastly, the most immediate factor was the relative impact of Covid-19 on the two economies in 2020.
This is not the first time that Bangladesh plunged ahead of India. In 1991, when India was undergoing a severe crisis and grew by just above 1%, Bangladesh’s per capita GDP surged ahead of India’s. Since then, India again took the lead.
How has Bangladesh managed to grow so fast and so robustly?
Formed from the poorest regions of Pakistan, Bangladesh has come a long way since its independence in 1971. However, moving away from Pakistan also gave the country a chance to start afresh on its economic and political identity.
(1) Low wages
- With wages in China rising, it has vacated about $140 billion in exports of unskilled labour-intensive sectors, including apparel, clothing, leather and footwear.
- Bangladesh being the low on wages successfully managed to harness the situation.
(2) Garment industry
- A key driver of growth was the garment industry where women workers gave Bangladesh the edge to corner the global export markets from which China retreated.
- It also helps its economy such that its GDP is led by the industrial sector, followed by the services sector. Both of these sectors create a lot of jobs and are more remunerative than agriculture.
(3) Diversification of labour
- Its labour laws were not as stringent and its economy increasingly involved women in its labour force.
- This can be seen in higher female participation in the labour force.
(4) Focus on developmental metrics
- Beyond economics, a big reason for Bangladesh’s progressively faster growth rate is that especially over the past two decades it improved on several social and political metrics.
- It included parameters such as health, sanitation, financial inclusion, and women’s political representation.
(5) Inclusive growth
- On financial inclusion, according to the World Bank’s Global Findex database, while a smaller proportion of its population has bank accounts, the proportion of dormant bank accounts is quite small when compared to India.
- This is the same reflected by the per capita GDP comparison which has triggered this BI.
(6) Gendered development
- Bangladesh is also far ahead of India in the latest gender parity rankings. This measures differences in the political and economic opportunities as well as the educational attainment and health of men and women.
- Out of 154 countries mapped for it, Bangladesh is in the top 50 while India languishes at 112.
Growing Bangladesh: An uneasy journey
The past 15 years have witnessed a tremendous turnaround in Bangladesh’s standing in the world. It has left Pakistan far behind and extricated itself from the tricky initial years to establish a democratic system. But its progress is still iffy.
- Poverty: Its level of poverty is still much higher than India’s. Moreover, it still trails India in basic education parameters and that is what explains its lower rank in the Human Development Index.
- Work hazards: But Bangladesh’s biggest worry is not on the economic front. Its loosely regulated garment industry is known to cut corners on labour safety and the onerous work conditions.
- Political turmoil: The bigger threat to its prospects emerges from its everyday politics. The leading political parties are routinely engaged in violent oppression of each other.
- High corruption: In the 2019 edition of Transparency International’s rankings, Bangladesh ranks a low 146 out of 198 countries (India is at 80th rank; a lower rank is worse off).
- Rise in Radicalism: Add to this a massive surge of radical Islam, which has resulted in several bloggers being killed for speaking out unpopular views.
These developments have the ability not just to arrest Bangladesh’s progressive social reforms that have empowered women but also to derail its economic miracle.
Instructive comparison: A way forward
- In part, Bangladesh’s recent economic performance, and differences between the two countries can be traced to the former’s stellar export performance, especially in garments and apparel.
- In comparison, India’s exports have remained sluggish, as export pessimism has taken hold.
- In the current context, with three of the four drivers of growth struggling, exports could provide the much-needed fillip to India’s economy.
- However, this would require India to reverse its recent stance on trade — lower rather than raise tariffs, embrace free trade agreements, and seek greater integration with global supply chains.
- This will provide India yet another opportunity. However, this will require the government to pivot away from protectionism.
We must look inwards
- Such comparisons are fundamentally flawed and if we were to undertake such comparisons then we must also seek accountability for how India’s per capita income fell drastically.
- There are two compelling issues here that need to be adequately discussed.
- First pertains to the comparisons being made, and the second with regards to our sudden realization of the fact that we need to catch up.
- Bangladesh will at some point have a higher per-capita income than India because India has a higher population.
- So even though we have a higher GDP in absolute levels, the per capita figure could be smaller in future years.
Bangladesh is doing well on the economic front must be appreciated as its augurs well for the global economy – and for the global fight against poverty. It must be viewed as a lesson, a reinforced lesson that our failure to embrace reforms would systematically result in us lagging.
Although the leaders of Bangladesh and India have similar goals, the difference in the country’s development models is making for an interesting experiment.
- Bangladesh has seen both structural transformation and the rise of sectors capable of generating decent foreign exchange earnings, which has helped policymakers sustain comfortable macroeconomic fundamentals.
- To sustain such economic progress in India, there is a need to improve core governance challenges — weak tax mobilization capacity, an over-burdened commodity basket, inadequate capacity — that have plagued almost all South Asian countries.
With many parts of the world quickly losing faith in the doctrine of free trade, and larger trading blocs increasingly veering towards protectionism, India needs to thoroughly examine its self-reliance policy in context within which it competes.