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Wednesday, August 25, 2021

What year in the history of an advanced economy is like India today?

by Ananya Goyal, Renuka Sane and Ajay Shah.

India has been stepping out from poverty into middle income. It is estimated that the proportion of persons below the PPP$1.90 poverty line has dropped to an estimated 87 million in 2020. In thinking about India's journey, it is interesting to ask: In the historical journey of advanced economies, What year in the history of the US or UK roughly corresponds to India of 2021? This is a good way to obtain intuition on where India is, in the development journey.

GDP measurement is a daunting enterprise. GDP measurement is particularly weak when it concerns the deep past of the UK or the US, or the Indian present. Measuring asset ownership such as cars and other assets can induce valuable insights. For many products (e.g. cars, washing machines, mobile phones, denim) we should look at the extent to which the product has reached into the households of the country. In this article, we ask: What is a time point in the history of the US or the UK which is comparable with where India is today, in terms of household asset ownership?

This is connected with the question "How big is the Indian middle class?" when we apply certain thumb rules such as "to own a car is to be middle class".

While these are fascinating questions, such comparisons have to be undertaken with care. When the highways are weak or when the public transport is strong, households will find cars less attractive. Closer to the equator, cooling technologies will be more appealing. And, most important, technological progress across the years has resulted in a sharp decline in the prices of many of these assets, through the wonders of mass production of assets like cars, and through Moore's law for CPUs.

In the interpretation of asset ownership information, we should maintain a distinction between causes and consequences. The causes are the factors such as household prosperity or climate or cost reduction, which shape the decision of household purchase. The consequences are about how a given household asset reshapes the welfare and culture of the household. The consequences appear more similar across space and time. As an example, the impact of personal transportation upon an individual is similar across countries and decades, regardless of the the decline in the real price of an automobile and the expansion of household income.

GDP measurement is faulty, and asset ownership measures across space and time are clouded by differences in the climate and by technological progress. No one element of this article is the single truth. We should assemble an overall picture in our minds, pooling all these aspects of the truth.

Per capita GDP

In 2020, per capita GDP in India (in PPP terms at 2011 prices), is $6806. Looking back into the history of the US and the UK, we get the dates:

Comparable year in US historyComparable year in UK history
Per capita GDP18961894

This places India of today as being roughly like these advanced economies at the dawn of the 20th century. By this measure, India is about 120 years behind the US or the UK in terms of economic development.

Women's labour force participation

Looking back into US history, the first measurement of women's LFP seems to be in 1890 and it shows a value of 18.2% (Smith & Ward, 1985). The women's LFP in India for 2020-21 is measured by CMIE at 9.2%. By this measure, India is at a state of maturity which is older than 1890 for the US.

Asset ownership

We use data from the September - December, 2019 Consumer Pyramids Household Survey to measure asset ownership in India. For each asset, we compute the fraction of households which own a stated asset.

AssetShare in India today (%)Comparable year in US history
Car 6 1915
Refrigerator 59 1945
Air conditioner 7 1955
Washing machine 25 1955
TV 95 2000
Computer 8 1985
Cars
In India today, 6% of households have a car. This value was obtained in the US in 1915.
The Ford Model T was introduced in 1908. Thus, the productivity gains associated with modern manufacturing have been in play for over a century before we get to the India of today. It was harder for a US household in 1915 to buy a car, as cars were then more expensive. Our measure (1915) is an over-estimate on account of improvements in mass production.
There are about 300 million households in India, so the installed base of cars used by households is about 18 million.
Cooling equipment
Demand for refrigerators and air conditioners in the US is likely to be lower than what we see in India owing to the climate. And, there have been great advances by way of cost reduction of refrigerators.
At present, 59% of Indian households have fridges, and the US was at such a value in 1945. Similarly, 7% of households in India have air conditioners, a value that was seen in the US in 1955. Both these values (1945 and 1955) are an over-estimate owing to (a) Differences in the climate and (b) Improvements in mass production.
With about 300 million households, these values map to about 20 million air conditioners and about 180 million refrigerators, in homes. The total Indian market size for these products is, of course, greater as there are also purchases by organisations like restaurants.
Washing machines
Washing machines are interesting in that there is no difficulty with the difference in climate, but there are cost reductions owing to improvements in mass production.
The US was at the present Indian value of 25% in 1955. This estimate (1955) is likely to be an over-estimate on account of improvements in mass production. An anonymous commentator points out that if clothes can be washed using cheap labour, the incentive to buy a washing machine is lower.
About a quarter of 300m households is about 75 million washing machines in existence in households in India today.
Electronics
The Indian value for television sets of 95% looks near-complete. This was only achieved in 2000 in the US.
With home computers, the Indian value of 8% is comparable to that seen in the US in 1985.
Both these values (2000 and 1985) are over-estimates owing to the dramatic decline of prices of electronic equipment.

Where is India when compared with the historical journey of the US or the UK? We have many answers. We have values of pre-1890 (women's LFP), 1896 (PPP per capita GDP), 1915 (cars), 1945 (fridges), 1955 (washing machines and air conditioners), 1985 (home computers) and 2000 (television sets). We think that overall, the asset-ownership based estimates are over-estimates on account of improvements in technology, and because households would value cooling equipment to a greater extent in the Indian warmth.

In terms of consequences, refrigerators and washing machines are both mechanisms to reduce household drudgery. When food can be stored in a refrigerator, the need to cook multiple times within the day is eliminated. The present Indian values are comparable with the US of 1945 (fridges) or 1955 (washing machines). India may then be at the cusp of change, with the emancipation of women that came in the US in the 1950s and the 1960s, when these appliances reduced the demands upon women for housework.

Economic development is hard to reduce into any single metric. As Yashwant Sinha once said, India lives in many different centuries at the same time. There are people and cultural traits in India today which are medieval, and there are pockets of India which are living at the global frontier of 2021. Each aspect of India is evolving through its own historical forces. We need to embrace and understand all aspects of this reality at once. In understanding India, we have to appreciate all these different clocks that are unfolding before us. The numbers discovered in this article help in building this intuition.

Sources

Nicholas Felton (2008), Consumption spreads faster today, The New York Times.

Homi Kharas, Laurence Chandy (2014) What Do New Price Data Mean for the Goal of Ending Extreme Poverty? , Brookings Institution

World Poverty Clock , World Data Lab. Retreived August 2021.

Maddison Project Database, version 2020. Bolt, Jutta and Jan Luiten van Zanden (2020), “Maddison style estimates of the evolution of the world economy. A new 2020 update ”.

Consumer Pyramids Household Survey (2019), Centre for Monitoring Indian Economy.

Historical Household Tables (1940-2020) Current Population Survey, US Census Bureau.

Smith, J., & Ward, M. (1985). Time-Series Growth in the Female Labor Force. Journal of Labor Economics, 3(1), S59-S90.

6 comments:

  1. Congratulations on the great effort at trying to meaningfully compare the state of India's progress with that of the developed world. One factor that is probably worth mentioning is about washing machines. While the blog states that because of technological improvements, the statistic on washing machines overstates India's progress, one needs to factor the rather low labour costs leading households to not own washing machines. While there may not be any study to support this thesis, there is enough anecdotal evidence in this regard. If one takes this into account, the washing machine statistic may not only be not overstating India's progress, but may well be understating it.

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  2. Great anylsis about the middle class, but where is the current Indian state compared to the historical US or UK state apparatuses? What metric or metrics would be helpful in such an analysis?

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  3. This is a lovely analysis... Gives a good sense of where we are.

    Am idea: can you please also please plot the metrics of India in say 2010 and 2000 and do the comparison? It will help us get a sense of "have we achieved in 10 years what the world took 5/10/15 years"... thank you.

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  4. Congratulations on the effort! Insightful. A sobering thought...

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  5. Another metric could be the intellectual development as reflected in the quality of books, theories in the field of management, economics etc. By those measures, India may have fared poorly and would place her in the mid 19th century.

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