The Per Capita Game

First the good news. Finance Minister Chidambaram stated on November 6, 2007 that the country has already exceeded a BRIC (Goldman Sachs investment bank report on Brazil, Russia, India and China) forecast of India's per capita income of $800 by 2010 and $1,149 by 2015. According to him, “we have exploded this assumption as our per capita income has already touched $1,000 this year and expect it to touch $4,000 by 2025."

Let us consider both sets of forecasts. BRIC forecast calls for a per capita income of Rs. 88 ($2.20) per day by 2010 and Rs. 126 ($3.15) by 2015. By contrast, the finance minister expects daily per capita income of Rs. 110 ($2.75) by this year and Rs. 438 ($10.95) by 2025. These forecasts compare against a daily per capita income of Rs. 82 ($2.05) estimated for 2007 (in nominal terms) in several published studies.

Per capita income should be calculated by dividing total personal income by the population. It is not calculated by dividing total output measures like GNP or GDP, which gives an exaggerated picture of per capita income. Only if a nominal (at current prices) GDP figure of $1.1 trillion and an exchange rate of Rs. 40/$ are used can one arrive at a daily per capita income of Rs. 110 ($2.75) for 2007. But that wouldn’t be correct.

Leave aside these discrepancies for a moment; after all, everyone wants to hear good news. The real question is whether the rapid rise in national per capita income is reflective of prosperity for all.

It was just two months back when India’s Central Ministry of Statistics reported that the daily per capita income of the rural population was Rs. 18.50 ($0.46) in 2005. With rural income rising no more than 5% per annum, the best estimate for 2007 is around Rs. 20.40 ($0.51). This estimate is consistent with the recent report by the National Commission for Enterprises in the Unorganized Sector (NCEUS) showing that 77% of Indians in 2004-2005 -- about 836 million people -- live on less than Rs. 20 ($0.50) a day. Obviously, there is a wide gap between the national daily per capita income figure of Rs. 110 ($2.75) estimated by the finance minister and the rural figure of Rs. 20.40 ($0.51) for 2007.

Even more troubling is the widening trend between national and rural figures. If we are to assume that rural per capita will increase by the same percentage as the change in national figure between 2007 and 2025, the gap between national and rural per capita will only widen from Rs. 90 ($2.25) in 2007 to Rs. 358 ($8.95) by 2025 – a whopping 400% increase. Undoubtedly, we have a society that does not share equitably the benefits of a growing aggregate economy.

The fact is that much of the rise in overall per capita income comes from the rapidly increasing personal income of the 34 million or so of people employed in the nation’s organized sector. These are the people who benefit most from the current economic expansion. Less than 10% of the nation’s population contribute to more than 90% of the growth in GDP and incomes.

The real test is in how the poor are benefited. With 770 million people living in the villages, and over 80% of them on less than Rs. 20 ($0.50) per day, what can we forecast about their future? All this talk about national per capita income adds up to very little when a great majority of people in the country is likely to remain below $1 per day in income even after another decade.

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