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  • Writer's picturePooja Ambala

Indian economy vs US economy

To compare the economies of India and the US, let's take a look at each countries economy separately:

Indian economy:

India is transitioning to a free-market economy, yet remnants of its previous authoritarian policies linger. Economic liberalisation initiatives, including industrial deregulation, state-owned firm privatisation, and reduced constraints on international trade and investment, began in the early 1990s and have helped increase the country's growth, which has averaged less than 7% per year since 1997. Traditional village farming, contemporary agriculture, handicrafts, a vast range of modern businesses, and various services are all part of India's varied economy. Agriculture employs slightly more than half of the workforce, while services are India's most important source of economic growth, accounting for roughly two-thirds of the country's GDP while employing less than one-third of its workforce. Thanks to its vast educated English-speaking population, India has become a significant exporter of information technology, corporate outsourcing, and software workers.

The Indian economy returned strongly from the global financial crisis in 2010, thanks mainly to strong local demand, and real growth exceeded 8% year on year. However, in 2011, India's economic development slowed due to a reduction in government spending and a drop in investment, both caused by investor scepticism about the government's commitment to further economic reforms and the worldwide situation. High international petroleum prices have compounded the government's fuel subsidy costs, adding a more significant fiscal deficit and increasing current account imbalance. To reverse India's slowdown, the Indian government proposed new reforms and deficit-reduction measures in late 2012, including increased foreign participation levels in the economy's direct investment. Due to a young population and low dependency ratio, robust savings and investment rates, and rising integration into the global economy, the outlook for India's medium-term growth is optimistic. Poverty, corruption, violence, and discrimination against women and girls, an inefficient power generation and distribution system, ineffective enforcement of intellectual property rights, decades-long civil litigation dockets, inadequate transport and agricultural infrastructure, limited non-agricultural employment opportunities, and insufficient availability of quality primary and higher education are all long-term challenges that India has yet to address fully.

US economy:

With a per capita GDP of $49,800, the United States possesses the world's largest and most technologically advanced economy. In a market economy, private individuals and businesses make most choices, while the federal and state governments mostly purchase goods and services from the private sector. In deciding to expand capital plants, lay off surplus staff, and develop new interests, US businesses have more flexibility than their rivals in Western Europe and Japan. Simultaneously, they face more significant hurdles to entry into their competitors' home markets than foreign enterprises do into US markets. Since the end of World War II, US companies have been at or near the forefront of technological developments, particularly in computers and medical, aerospace, and military equipment; nevertheless, their advantage has diminished. The gradual growth of a "two-tier labour market," in which those at the bottom lack the education and professional/technical skills of those at the top and, increasingly, fail to receive comparable pay raises, health insurance coverage, and other benefits, is primarily explained by the surge of technology. Almost all of the increases in household income since 1975 have gone to the top 20% of households. Dividends and capital gains have grown at a higher rate than salaries or any other type of after-tax income since 1996. Nearly half of the oil consumed in the United States is imported. When home prices peaked between 2001 and 2006, crude oil prices doubled; rising fuel expenses ate into consumers' budgets, and many people fell behind on their mortgage payments.

Between 2006 and 2008, oil prices increased by 50%, while bank foreclosures increased by more than 100%. Soaring oil prices not only stifled the housing market but also lowered the value of the dollar and worsened the US merchandise trade deficit, which peaked at $840 billion in 2008. By mid-2008, the United States had entered a recession due to the subprime mortgage crisis, declining property prices, investment bank failures, limited credit, and the global economic slowdown. This was the darkest and longest downturn since the Great Depression, lasting until the third quarter of 2009. The US Congress approved a $700 billion Troubled Asset Relief Program in October 2008 to help calm financial markets (TARP). The government utilised some of this money to purchase equity in US banks and industrial businesses, with the majority of these funds being returned to the government by early 2011. In January 2009, the US Congress passed. President Barack OBAMA signed a law giving an additional $787 billion fiscal stimulus over ten years – two-thirds on new spending and one-third on tax cuts – to assist the economy recover and create employment.

The government budget deficit reached nearly 9% of GDP in 2010 and 2011. The federal government cut spending growth in 2012, and the deficit shrank to 7.6% of GDP. The wars in Iraq and Afghanistan necessitated significant changes in national resources from civilian to military, which exacerbated the budget deficit and public debt. According to US official data, the conflicts cost almost $900 billion in direct costs through 2011. Taxes and other sources of revenue in the United States are lower as a percentage of GDP than in most other countries. President Barack Obama signed the Patient Protection and Affordable Care Act into law in March 2010, a healthcare reform bill aimed to cover an additional 32 million Americans by 2016 through private health insurance for the general public and Medicaid for the poor. Both public and private, total healthcare spending increased from 9.0 percent of GDP in 1980 to 17.9 percent in 2010.

The DODD-FRANK Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in July 2010 to promote financial stability by protecting consumers from financial abuses, ending taxpayer bailouts of financial firms, dealing with troubled banks that are "too big to fail," and improving financial system accountability and transparency - in particular, by requiring certain financial derivatives to be traded in regulated markets. The Federal Reserve Board announced plans in December 2012 to buy $85 billion per month in mortgage-backed and Treasury securities to keep long-term interest rates low and short-term rates near zero until unemployment falls to 6.5 percent from 7.8 percent in December, or inflation rises above 2.5 percent. Long-term issues include wage stagnation for lower-income families, inadequate infrastructure investment, fast-rising medical and pension expenditures due to an ageing population, energy constraints, and large current account and budget deficits, particularly considerable budget deficits for state governments.

The Indian economy shrank by about a quarter in April-June, more than projected. India's Q1 performance, which saw the country's first GDP decline in more than 40 years, has elicited various reactions from diverse corners.

Since the data were released, a war of words has raged on social media, particularly Twitter, where the hashtag #GDPTruth is trending. One party believes that India outperformed counterparts such as the United States in the June quarter, while the other dismisses such claims.

The fact that the US GDP contracted 32 percent while India merely acquired 23.9 percent in the June quarter was a particularly deceiving number-play.

Many on Twitter seemed to believe that India performed better than its counterparts, declining at a much lower rate in the June quarter. While this could not be further from the truth, some well-known journalists were duped by the false data.

There are still articles on the internet that falsify global GDP figures. Some of them even include manipulated images that were circulating on social media platforms like Twitter and WhatsApp. Some high-profile news outlets broadcasted false comparisons, and the videos are still uncorrected online.

All of this appears to have irritated economic commentator Vivek Kaul enough to write a blog post explaining why this comparison — a 32 percent contraction in US GDP versus a 23.9 percent contraction in India in the June quarter — is entirely incorrect.

"Different countries calculate GDP in different ways," explains Madan Sabnavis, CARE Ratings' Chief Economist. "We do year-over-year (YoY), while others do quarter-over-quarter," she says (QoQ). As a result, while we compare Q1FY20 to Q1FY19, other nations may compare Q2 (April-June) to Q1 (January-March) after adjusting for seasonality," he continues.

That's where the disparity between India's and the United States' GDP growth reporting comes into play. In India, quarterly GDP growth is determined by comparing the current quarter to the same quarter the previous year, a YoY comparison, which puts India's GDP contraction at 23.9 percent for the June quarter.

On the other hand, the US makes a quarter-to-quarter comparison before annualizing the result. Meaning: A quarter's GDP is compared to the previous quarter's GDP. As a result, they predicted that the current quarter's decline would continue at the same pace for the next three quarters, resulting in an annualised contraction of 32% for the US economy.

If they had done it QoQ, the differential figure of contraction for the US economy would be 9.1 percent, according to a tweet by Gita Gopinath, Chief Economist, IMF.

"These are two entirely different measures that cannot be compared." "One compares what happened this quarter to the previous quarter (the US 32%), while the other one compares what happened this quarter to the same quarter last year (the US 9% and India 24%)," explains Jayati Ghosh, JNU Professor of Economics.

According to Reetika Khera, Professor of Economics at IIT-D, such similarities are solely being made to insulate the government from criticism for its management of the pandemic and the lockdown. "Behaving like an ostrich isn't going to assist us," she continues.

The value of knowing official data sources and checking data cannot be overstated independently. "Because one may not be familiar with all of the countries' data reporting methods," said R Nagaraj, an IGIDR professor. "It is better to utilise the numbers put out by the IMF, World Bank, The Economist, or CEIC."

According to Sabnavis, there is nothing wrong with either approach; data becomes contentious when misused. "Such comparisons would not be proper because the epidemic afflicted us all at various times, and the quarantineS has been lifted at a different speed in all nations," he says.

If not for the monkey business, comparing GDP data can be pretty instructive. It could be instructive to look at countries that have done a better job of cushioning the economic damage than we have. "People frequently misuse figures to convey factually incorrect viewpoints," Nagaraj remarked. This is a valuable technique since the basic ideas of national income and methods for estimating them are largely standardised.

Ghosh believes there is a genuine need to compare economic statistics in the current political climate. "What is happening in India is described as an 'act of God' that has equally impacted all countries. India has the lowest performance of all the big economies. This is because the Modi government's policy response was flawed. "The lockdown was imposed suddenly, without warning or preparation, and no social protection was given to those left without livelihoods, which would have at least preserved some demand," she explains.

According to the International Monetary Fund figures, the United States remains the world's largest economy (IMF). Its gross domestic product (GDP) is expected to be $21.4 trillion in current values in 2019.

Last year, India surpassed the United Kingdom and France to become the world's fifth-largest economy, estimated at $2.94 trillion, based on the same data.

GDP India In current prices, the GDP of the United States and India.

IMF image

However, the disparity deepens when measured in terms of GDP per capita (again, in current values). Last year, this was estimated to be $65,100 in the United States. In India, however, this sum is only $2,100.

The American economy is the world's largest, with a value of $ 19.3 trillion in 2017. The Indian economy, on the other side, is the world's sixth-largest, with a value of $2.65 trillion.

(This year, the cross-UK will be the fifth largest).

The split of the American economy's GDP sector is as follows:

Agriculture accounted for.09 percent of the total.

Industry accounts for 19.8% of the total.

80.1 percent of the economy is made up of services.

The service industry, which includes IT giants and the financial sector, dominates economic activity in the United States. The financial sector accounts for 20% of all corporate earnings. Over the last few years, industrial action has slowly shifted from the United States to China and Mexico. Made-in-the-USA imports account for 80% of total imports. Its exports are nearly $550 billion less than its imports, resulting in a current account deficit of 3.5 percent of GDP. It also has a fiscal deficit of around 3.5–3.9 percent of GDP. The United States is also heavily in debt, with a total governmental and private debt of $ 58 trillion (3 times its GDP). Over the previous 25 years, this liability has hampered expansion. The current GDP growth rate is 2.3 percent, while the government bond yield is 2.7 percent, indicating a moderate inflation outlook. (This implies that GDP growth will be less than 3% in the foreseeable future)

The Indian economy's GDP bifurcation is as follows:

Agriculture accounts for 17.5 percent of the total.

Industry accounts for 29% of the total.

50.33 percent of the time is spent on services.

India's economy is more balanced, with the industrial sector accounting for 29% of GDP. Agriculture's percentage of GDP is gradually declining, while the service sector's share is increasing. Refined crude, precious stones, agricultural, manufactured commodities, and information technology services are India's top exports. Oil, gas, and coal account for a third of its imports. Capital goods and defence equipment are examples of other substances. The current account deficit is 105 billion dollars ( 4.1 percent of GDP). The fiscal deficit is at 5% of GDP. However, because India's economy is growing at around 4%, with a 7% GDP growth rate and a capital account surplus, deficits are bearable if they don't lead to excessive inflation. India's total debt, both private and public, is less than 100% of its GDP. (about 85%)

Both the United States and India have consumer-driven economies. India's industrial sector is expanding, and exports will likely increase as the rupee depreciates against the Yen, Euro, and Dollar. The United States, as a mature economy, has a debt and twin deficit problem. Poverty affects 12.7 percent of the population ( not suitable for a developed economy). India's growth prospects are significantly brighter than those of the United States, and India will overtake the United States as the world's third-largest economy within the next ten years.

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