Correlation between GDP per Capita & GDP Growth (India’s Perspective)4 min read
India’s GDP per Capita crossing USD 2,000 can set India for high growth path. How? Here, with the help of multiple country specific case studies, we will discuss how the GDP growth shapes up post the country crosses such mark of per capita.
Also, we would analyse how this GDP per capita helps an economy to grow as GDP per capita increases.
What is GDP?
GDP (Gross Domestic product), simply means total market value of final goods & services produced within a country during a certain time period. For Example, the total market value of all final goods and services produced by India during FY22 is the GDP figure for India for FY22 only.
On the flip side, since one person’s expenditure is other person’s income, the GDP figure is also analysed as how much did people living in India together earned during FY22 is India’s GDP for FY22.
What are the components of GDP?
Nominal GDP = Private Consumption
Gross Private Investments
Government spendings and Investments
What is GDP per capita?
GDP per capita = GDP of a nation for a year
In simple terms, it means how much does each person in the country earns on a gross basis. It provides an average income level number for a nation. One of the flaws with this metric is that it does not capture the income inequality in that country.
In the above chart ‘China – Nominal GDP growth rate chart vs GDP per capita’, the X-axis portion comprises of GDP per Capita range and the Y-axis shows the Nominal GDP CAGR growth rates posted by China during period of increase in per capita from USD 100 – USD 200 etc.
Nominal GDP includes real GDP growth and inflation for that particular year.
The chart highlights one of the important observations that as China’s GDP per capita has grown, China’s Nominal GDP is also growing at faster rate. It is important to understand that the discussion is about the growth rate and not about GDP amount.
Increase in GDP growth highlights more economic activity happening in that country. It happens because as average income levels in any nation increases, it lends a discretionary spending power to the people in that nation.
Let’s say person A earns INR 25,000 per month. From this income, he can merely fulfil his need-based consumption and might not be able to spend on what he desires. Need based consumption includes basic needs such as food, clothing & shelter whereas want based consumption includes spending on buying vehicles, new gadgets etc.
If his income increases from current INR 25,000 to INR 60,000 per month, he can spend on discretionary items such as branded footwear, clothing, vehicles, watches etc.
So, as income levels increases, therefore, the GDP per capita grows and thereby lends discretionary consumption power with people, which in turn leads to higher GDP growth driven by higher level of spendings in the nation.
Also, in the same chart, it is visible that as China crossed their USD 1,000 GDP per capita mark, their nominal GDP growth rate increased for a certain time period.
Also, the returns in stock market are linked to that of economic growth in the nation. Economic growth in a nation is the reflection underlying growth given by the companies operating in that nation. Therefore, the Nominal GDP growth rate is the blended corporate and other categories growth rate posted by all the sectors. So, ultimately, the broader stock market returns turn out to be similar to that of overall economic growth, as the Price / Earnings multiple of broader markets cannot be expected to grow all the time. So, in longer term, the growth in any nation is reflection of volume and price led growth posted by companies.
As discussed in case of China, similar past trends are seen in other nations:
In all of the above case studies, the analysis states that as the GDP per capita increases or crosses certain GDP per capita mark, the nominal GDP growth rate increases in coming years. There exists certain positive correlation between GDP per capita and Nominal GDP growth rate number. Also, the cases suggest that as a nation crosses GDP per capita mark of USD 1,000 or USD 2,000, the nominal GDP grows in double digit going ahead for certain number of years, thereby acting as an inflection point.
Currently, India is standing at USD 2,000 – 2,500 per capita mark and based on the above analysis, it can be expected that India might show similar trend of double-digit growth for few years ahead till the GDP per capita touches USD 10,000.
In the past, India’s GDP grew from USD 1,662 billion (FY15) to USD 2,663 billion (FY20), which is expected to grow to USD 4,049 billion by FY25, with a growth expectation of 11% CAGR. The growth is expected to be driven by private consumption which in turn is expected to be driven by expected growth in discretionary spendings in India.
Also, in the past, total households increased from 236 million as of 2009 to 320 million by 2020. In addition, share of total households earning USD 10,000 to USD 50,000 increased from 5% as of 2009 to 31% as of 2020. This shows that the share of total households which are earning income more than USD 10,000 per annum has increased which indicate that the income levels have increased in the past decade.
Therefore, based on all this analysis, as India’s GDP per capita increases, India’s consumption is expected to grow and thereby India’s GDP growth would also be faster. Further, the stock market would also increase at the similar rate as that of India’s Nominal GDP growth rate.