An opinion piece in the International Herald Tribune drew my attention to a report published by The World Bank in mid-Dec 2007. The study measured the relative size of 146 economies (for the year 2005) using the 'purchasing power parity' (PPP) method. The World Bank study had concluded that the economies of India & China were about 40% smaller than earlier estimates, based on revised calculations using consumers' relative purchasing power to measure economic might.

This set me thinking, "how much truth is there in the conclusions arrived at by The World Bank"? Let me clarify at the outset that I am no economist to do a systematic interpretation of the findings; what follows below is my "gut feeling" analyses.

Being an Indian, let me focus on India. I fully agree with the findings that India's economy is indeed smaller than what everyone would like to believe. The reasons for this stand are as follows:

1. India's emergence on the global economy is fairly recent - 15 years is too short a time to undo the wrongs of the preceeding 45 years. The systemic ills plaguing the Indian economy are still strong enough, if not as strong as during the centrally-planned economy years

2. The benefits of liberalization and globalization are still restricted to certain geographical areas of the country as also certain economic sectors. For example, the IT boom is mostly concentrated in the Southern metros of India while the petrochemicals sector is thriving mostly in Gujarat, in western India. Large parts of northern & eastern areas are severly lagging behind in terms of development. The traditionally poor & populous BIMARU states - Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh - are still largely agrarian economies and inefficient ones at that, as they are heavily dependent on the seasonal rainfalls.  Worse, the northeast India (the so-called "seven sisters") are as good as a foreign country in the minds of the common people.

3. This unequal distribution of wealth  has resulted in India's per capita income being just a bit more than that of sub-Saharan Africa, and about one-sixth that of Latin America. Worse still, 35% of India's population lives on less than $1 a day (source:

4. The sunshine sector of the Indian economy - IT - generated USD 47 billion, contributed 5.4% to the national GDP & created direct employment for 1.63 million people in the financial year ending 31-Mar-07 (NASSCOM report). To put things in perspective, Foxcomm, the world's biggest contract manufacturer of electronics employs 2.7 million people and generated revenues of 40.6 billion USD in 2006! (source: "The Forbidden City of Terry Gou")

5. A large portion of the lure of the Indian economic miracle can be ascribed simply to the FIIs looking for arbitrage opportunities. This has led not only to a self-fulfilling prophecy of the Indians having arrive but also created a bubble in the economy, especially in the real estate sector. When this bubble burst, there will be lots of ordinary Indians affected, in addition to the foreign investors

6. Politically, India is a hugely fragmented nation with competing pulls and pushes across various fault lines - geographical, religious, caste-based, class-based, etc. And the Indian politician have, for the most of the time since Independence, served one vested interest or the other, never bothering to rise above petty considerations and marshal the resources for the social & economic upliftment of the people. This political instability can result in a huge dampener in the economic growth

Having painted such a bleak picture, does it mean that I am pessimistic about India's future? Hardly! As I mentioned in the opening paragraph, I agree that India's economy is not as big as is made out to be. However, I do believe that with its size & enterprising people, India can move on at a faster pace and take its rightful place in the global economy. She is not called an elephant for no reason - elephants are slow to start but once they start running, their sheer weight gives them a terrific momentum!

The novice financier may ask, "So, what does it have to do with finance or finanxialIT?" The experienced financier knows that understanding these economic underpinnings of one of the largest & fastest growing nations is critical if he or his company aims to service this market profitably. This is the principal reason that all the leading Indian banks (nationalized, private sector, and foreign-owned) are talking of the fortune to be made at the bottom of the pyramid and investing in technologies like ATMs using fingerprint (or thumb) recognition technologies, microfinance & microentrepreneurship, etc.