“LOW PER CAPITA INCOME AND ITS IMPACT ON GROWTH”

A Project submitted in partial fulfilment of the course MANAGERIAL

ECONOMICS(BACKLOG), 3RD SEMESTER during the Academic Year
2020-2021

SUBMITTED BY:
Rishabh Sinha
Roll No. - 2034
B.B.A., LL.B.(Hons.)

SUBMITTED TO:
Dr. Manoj Mishra
FACULTY OF MANAGERIAL ECONOMICS

OCTOBER, 2020
CHANAKYA NATIONAL LAW UNIVERSITY, NAYAYA NAGAR,
MEETHAPUR, PATNA-800001
 DECLARATION BY THE CANDIDATE

I hereby declare that the work reported in the B.B.A. ,LL.B. (Hons.) Project Report entitled ―
LOW PER CAPITA INCOME AND ITS IMPACT ON GROWTH‖ submitted at Chanakya
National Law University; Patna is an authentic record of my work carried out under the
supervision of Dr. Manoj Mishra. I have not submitted this work elsewhere for any other
degree or diploma. I am fully responsible for the contents of my Project Report.

(Signature of the Candidate)

Rishabh Sinha
Chanakya National Law University, Patna
 ACKNOWLEDGEMENT

“IF YOU WANT TO WALK FAST GO ALONE

IF YOU WANT TO WALK FAR GO TOGETHER”
A project is a joint endeavour which is to be accomplished with utmost compassion, diligence
and with support of all. Gratitude is a noble response of one‘s soul to kindness or help
generously rendered by another and its acknowledgement is the duty and joyance. I am
overwhelmed in all humbleness and gratefulness to acknowledge from the bottom of my
heart to all those who have helped me to put these ideas, well above the level of simplicity
and into something concrete effectively and moreover on time.
This project would not have been completed without combined effort of my revered
Managerial Economics faculty Dr. Manoj Mishra whose support and guidance was the
driving force to successfully complete this project. I express my heartfelt gratitude to him.
Thanks are also due to my parents, family, siblings, my dear friends and all those who helped
me in this project in any way. Last but not the least; I would like to express my sincere
gratitude to our Faculty for providing us with such a golden opportunity to showcase our
talents. Moreover, thanks to all those who helped me in any way be it words, presence,
encouragement or blessings...

- Rishabh Sinha
- 3rd Semester
- B.B.A., LL.B.(Hons
 TABLE OF CONTENTS

Declaration…………………………………………………………………………………….i

Acknowledgement…………………………………………………………………………….ii

Table of Contents…………………………………………………………....……………….iii

Aims and Objectives……………………………………………………………………….…iv

Hypothesis.................................................................................................................................iv

Research Methodology......................................................................................................…...iv

1. Introduction

2. What is Per Capita Income?

3. Impact of low per capita income on economic growth

4. Limitations of Per Capita Income

5. Per Capita Income in developing countries

6. Conclusion and suggestions

Bibliography
 AIMS AND OBJECTIVES

The Aims and Objectives of this project are:

1. The researcher tends to analyze the limitation on per capita income.
2. The researcher tends to throw light on the impact of economic growth in a country due to
low per capita income.
3. The researcher tends to emphasize the characteristics of per capita income.

HYPOTHESIS

The researcher has taken the following hypothesis :

Per Capita Income plays no role in assessing a country‘s wealth.

RESEARCH METHODOLOGY

For this study, doctrinal research method was utilised. Various articles, e-articles, reports and
books from library were used extensively in framing all the data and figures in appropriate
form, essential for this study.
The method used in writing this research is primarily analytical.
 INTRODUCTION

Per Capita income is a measure of the amount of money earned per person in a nation or
geographic region. Per capita income can be used to determine the average per-person
income for an area and to evaluate the standard of living and quality of life of the population.
Per capita income for a nation is calculated by dividing the country's national income by its
population.
Per capita income counts each man, woman, and child, even newborn babies, as a member of
the population. This stands in contrast to other common measurements of an area's prosperity,
such as household income, which counts all people residing under one roof as a household,
and family income, which counts as a family those related by birth, marriage, or adoption
who live under the same roof. Perhaps the most common use of income per capita is to
ascertain an area's wealth or lack of wealth. Per capita income is also useful in assessing an
area's affordability. It can be used in conjunction with data on real estate prices, for instance,
to help determine if average homes are out of reach for the average family. Notoriously
expensive areas such as Manhattan and San Francisco maintain extremely high ratios of
average home price to income per capita.

There are many limitations to per capita income and it can be skewed easily based on living
standards as it doesn‘t provide an acute representation of income or the standard of living. Per
Capita includes children in the total population , but children don‘t earn any income. Per
capita income doesn‘t reflect savings or wealth so for example a person with low income has
huge amount of savings to live a higher standard of living. Per capita income would reflect
him as a low income earner.
It may be worth recollecting where India stands in the per capita income league tables, just to
reiterate the importance of strong economic growth. The World Bank classifies the world's
economies into four income groups – high, upper-middle, lower-middle, and low. India falls
in the category of lower-middle income countries, which have a per capita income in the
range of $1,026-3,9951 .
India‘s per capita income is somewhere in the middle of that range estimated at $2,015.6 for
2018. Incidentally, there are 47 countries in this grouping with an average per capita income

1
https://www.bloombergquint.com/opinion/india-per-capita-income-growth-that-one-economic-target-india-
must-set-and-achieve
of $2,218.9. India is below that average. In terms of rank, India is at about the 30th country in
this segment.
India‘s first objective ought to be to move to the ‗Upper Middle Income‘ category. While the
precise benchmarks for what qualifies as ‗Upper Middle Income‘ change from year to year,
India has to roughly double its per capita income to get there at current income thresholds.
The immediate priority is to stop the bleed, by restoring the flow of financing to the
economy. With the RBI governor making it clear the there will be no bank-driven rescue of a
failing non-bank lender, perhaps the best option continues to be an asset quality review which
lifts the veil of suspicion shrouding the sector.
Alongside, a coordinated monetary policy and fiscal policy response is needed to restore
consumer spending, which has been the strongest pillar of India‘s economic growth. From
there on, there is much heavy lifting to be done. Pushing up investments, focusing on jobs
and income growth rather than denying that the problem exists, improving competitiveness of
exports and under-taking long delayed factor market reforms.
No one said it was going to be easy. But if India‘s wants to make a leap to double its per
capita income rather than crawl to it, it must be done 2 . Businesses can also use per capita
income when considered opening a store in a town or region.

If a town's population has a high per capita income, the company might have a better chance
at generating revenue from selling their goods since the people would have more spending
money versus a town with a low per capita income.

2
Ira Dugal, Editor-Bloomberg-Quint,Banking Finance, economy
 WHAT IS PER CAPITA INCOME?

Per capita income (PCI) or average income measures the average income earned per person
in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the
area's total income by its total population.
Per capita income is national income divided by population size. Per capita income is often
used to measure a sector's average income and compare the wealth of different populations.
Per capita income is often used to measure a country's standard of living.
t is usually expressed in terms of a commonly used international currency such as
the euro or United States dollar, and is useful because it is widely known, is easily calculable
from readily available gross domestic product (GDP) and population estimates, and produces
a useful statistic for comparison of wealth between sovereign territories. This helps to
ascertain a country's development status. It is one of the three measures for calculating
the Human Development Index of a country. Per capita income is also called average income.
The current Covid-19 crisis may lead to a decline of 5.4 per cent in the per capita income
(PCI) of Indians in fiscal year 2021 to Rs 1.43 lakh, higher than the the nominal GDP decline
of 3.8 per cent3 .
To get to China‘s current per capita income ,India‘s income will have to rise by 8.8% every
year for 10 years. But China isn‘t yet a rich country. It‘s an upper-middle income country
with per capita income only about a quarter of high-income countries. To reach US‘s current
level of income, India's per capita income needs to grow by 23% year-on-year for 10 years —
an impossibility.
Breaking it down to the state, there was a stark difference in the decline between states, with
a total of 8 states and union territories (UTs), which constitute as much as 47 per cent of
India‘s GDP, expected to witness a decline in PCI in double digits in fiscal year 2021. Delhi
and Chandigarh may see a decline of 15.4 per cent and 13.9 per cent respectively, which
would be nearly three time the decline at all-India levels.

This is due to the fact that these are the urban areas (and red zones also) where lockdown was
implemented most severely. In about 8 states and UTs the PCI decline was likely in double
digits. The closure of markets, shopping complexes and malls adversely affected income of
3
https://economictimes.indiatimes.com/markets/stocks/news/indias -per-capita-income-to-drop-by-5-4-in-
fy21-report/articleshow/76532582.cms
these areas. Even after opening of markets , the number of customers is still 70-80 per cent
less than the normal times.
Telangana has shown consistent increase in Per Capita Income (PCI) growth rate when
compared to national average of PCI growth rate and other states over the last four years. The
statistical abstract 2020 released by the state planning department showed that the four-year
growth rate of PCI of Telangana at current prices stands at 13.3%, achieving the second rank
in the country.The state is preceded only by Sikkim which recorded a growth of 13.7%.4

The growth rate every year has not been less than 9%. The national growth rate at the same
time was oscillating between 7% to 9%.
The four-year growth rate of PCI of states also revealed that Telangana is closely followed by
Mizoram, Tripura and Madhya Pradesh. Taking the growth rate of past four years at constant
prices (taking prices of 2011-12 as base year), the state has a good record.
The state has PCI (at constant prices) of Rs 1,53,972 and growth rate in last four years stands
at 9.1%. The state stands at third place and is preceded by Goa with 13.3% growth rate and
Karnataka with 10% growth rate.

4
https://timesofindia.indiatimes.com/city/hyderabad/state-second-in-per-capita-growth-rate-in-
country/articleshow/78941176.cms
IMPACT OF LOW PER CAPITA INCOME ON ECONOMIC GROWTH

Every company on earth exists because of demand. People need food and homes, and they
demand it with money. They want movies, and they want cars, and they want little porcelain
nick-nacks of big headed children, and the demand that with money. That demand is filled by
people willing to grow food, or act in front of a camera, or make little porcelain figures of big
headed children (often cuddling with something or kissing another big headed child) for the
money offered. They do this because the money they receive allows them to demand things
like tickets to a football game, or gasoline.

Some of these things are obvious necessities. Some are not. Necessities need met first, and
that‘s the bare minimum amount of demand (in economies without enough money people
build their own houses out of sticks, mud, hides, bomb rubble, etc., the demand is met or
death happens, and it‘s much sadder than porcelain figures of big headed children, but the
concept needs to be understood to get to the answer of your question). The unnecessary
demand is known as disposable income. It‘s obviously income above and beyond the bare
minimum needed.

Lower per capita income can have many causes, but the reason is always the same: there is a
lack of resources available to part or all of the population. Sometimes it‘s a very rich upper
class refusing to share a source of wealth, other times it can be a drought causing a food
shortage. Either way, you end up with a lower income per person, which reduces demand.
Since something like food is always necessary, the shrinking wealth pool (either from prices
rising or income falling) will go to necessities at a higher percentage.

If demand gets low enough you lose out on the knick-knack makers. This may not seem like a
big deal, but that further reduces demand, because the people who painted the eyes on the big
headed children are still going to want, need, and acquire food and shelter and water, but they
won‘t be able to pay for it. Some countries have social safety nets in place to alleviate it, in
others they will steal it, in still others they‘ll do subsistence labor, but the options are acquire
it or die, so they acquire it first, above all else. They are left with no disposable income,
meaning they don‘t buy football tickets.
This puts a hotdog vendor out of a job. He doesn‘t buy Lynard Skynard T-Shirts, putting the
T-Shirt printer out of a job, who in turn can‘t buy whatever it is that screen printers buy.

And the per capita income keeps declining with each job loss.

Now, if that income dips below the necessary survival line (called the poverty line), you
generally have a real crisis for everyone, obviously, and this is a bit of a watered down and
extreme example, but low per capita income means you don‘t have demand, and demand
creates jobs.

In the broadest sense, per capita income matters because it serves as a measurement of the
stability and wealth within an economy. Per capita income is a ratio of the amount of all a
region's income divided by its population. Thus, if the ratio rises, it suggests that members of
the population are more prosperous than they have been in the past. Conversely, a reduced
per capita figure suggests that the standard of living in a region has decreased, assuming the
price of goods has either stayed the same or increased with inflation. Even though there are
many good uses of per capita income, it is only useful when there is a relatively low number
of very high or very low earners in the community. These outliers could create biased per
capita income results that do no represent the area accurately.
Additionally, because per capita figures do not tell you how income is distributed, it can
mask social issues, which cause the average income in those regions to rise or fall. ndia is a
classic example of how going by the numbers can be misleading. Based on total individual
wealth in 2016, India had over $5.2 trillion in its people‘s coffers, which puts it in the world‘s
top 10 wealthiest economies. By that number, it's a rich country, right? Break that down by
the 1.35 billion who live in India, though, and suddenly you have a GDP per capita of just
$6,658, which means India is ranked 126th in the world for personal income in 2016. And
that number still doesn‘t tell the whole truth because according to the World Bank, 58 percent
of India‘s people were living on just $3.10 per day in 2014, or about $1,128 per year.

India‘s economy may be growing, but it‘s also a case of that proverbial ―rich getting richer
and poor getting poorer,‖ since the cost of living is increasing as a consequence of their
economy growing.
 LIMITATIONS OF PER CAPITA INCOME

Although per capita income is a popular metric, it does have some limitations.
Livings Standards
Since per capita income uses the overall income of a population and divides it by the total
number of people, it doesn't always provide an accurate representation of the standard of
living. In other words, the data can be skewed, whereby it doesn't account for income
inequality.
For example, let's say a town has a total population of 50 people who are earning $500,000
per year, and 1,000 people earning $25,000 per year. We calculate the per capita income as
($500,000 * 50) + (1,000 * $25,000) to arrive at $50,000,000 in total income. When we
divide $50,000,000 / 1,050 (total population), the per capita income is $47,619 for the town.
However, the per capita income doesn't give us a true picture of the living conditions for all
of those living in the town. Imagine if federal aid or public assistance was provided to towns
based on per capita income. The town, in our example, might not receive the necessary aid
such as housing and food assistance if the income threshold for aid was $47,000 or less.
Inflation
Per capita income doesn't reflect inflation in an economy, which is the rate at which prices
rise over time. For example, if the per capita income for a nation rose from $50,000 per year
to $55,000 the next year, it would register as a 10% increase in annual income for the
population. However, if inflation for the same period was 4%, income would only be up by
6% in real terms. Inflation erodes the purchasing power of the consumer and limits any
increases in income. As a result, per capita income can overstate income for a population.

International Comparisons
The cost of living differences can be inaccurate when making international comparisons since
exchange rates are not included in the calculation. Critics of per capita income suggest that
adjusting for purchasing power parity (PPP) is more accurate, whereby PPP helps to nullify
the exchange rate difference between countries. Also, other economies use bartering and
other non-monetary activity, which is not considered in calculating per capita income.
Savings and Wealth
Per capita income doesn't include an individuals savings or wealth. For example, a wealthy
person might have a low annual income from not working but draws from savings to
maintain a high-quality standard of living. The per capita metric would reflect the wealthy
person as a low-income earner.
Children
Per capita includes children in the total population, but children don't earn any income.
Countries with many children would have a skewed result since they would have more people
dividing up the income versus countries with fewer children.
Economic Welfare
The welfare of the people isn't necessarily captured with per capita income. For example, the
quality of work conditions, the number of hours worked, education level, and health benefits
are not included in per capita income calculations. As a result, the overall welfare of the
community may not be accurately reflected.
It's important to consider that per capita income is only one metric and should be used in
conjunction with other income measurements, such as the median income, income by
regions, and the percentage of residents living in poverty.
 PER CAPITA INCOME IN DEVELOPING COUNTRIES

The low- or middle-income trap phenomenon has been widely studied in recent years.
Although economic growth during the postwar period has lifted many low-income economies
from poverty to a middle-income level and other economies to even higher levels of income,
very few countries have been able to catch up with the high per capita income levels of the
developed world and stay there. As a result, relative to the U.S., most developing countries
have remained, or been "trapped," at a constant low- or middle-income level.

Such a phenomenon raises concern about the validity of the neoclassical growth theory,
which predicts global economic convergence. Specifically, economics Nobel Prize winner
Robert Solow suggested in 1956 that income levels in poor economies would grow relatively
faster than income in developed nations and eventually converge with the latter through
capital accumulation. He argued that this would happen as technologies in developed nations
spread to the poor countries through learning, international trade, foreign direct investment,
student exchange programs and other channels.

But the cases in which low- or middle-income countries have successfully caught up to high-
income countries have been few.

Many poor countries today have a per capita income that is 30 to 50 times smaller than that of
the U.S. and sometimes even lower (less than $1,000 per year in 2014). For such countries to
catch up to U.S. living standards, it may take at least 170 to 200 years, assuming that the
former could maintain a growth rate that is constantly 2 percentage points over the U.S. rate
(which is about 3 percent per year). This would be difficult, if not impossible. It is even
harder to imagine that such countries could reach U.S. living standards within one to two
generations (40 to 50 years), similar to how North American and Western European
economies caught up to Britain during the 1800s after the Industrial Revolution. To achieve
that speed of convergence today, the developing countries would need to grow about 8
percentage points faster than the U.S. (or about 11 percent per year) nonstop for 40 to 50
years. In recent history, only China came close to this; it was able to maintain a 10 percent
annual growth rate (7 percentage points above the U.S. rate) for 35 years, but per capita
income in China was still only one-seventh of that in the U.S. in 2014.
To further investigate the issue of why some countries have failed to climb the income ladder
and others have succeeded, we dig deeper into the diverging cases of Ireland and Mexico.
Both countries maintained a roughly similar level of development in terms of per capita
income going back as early as the 1920s. However, each took dramatically different
approaches to development in the postwar era, leading to the different outcomes seen,
especially after the 1980s. This occurred despite both nations' adopting political democracy:
Mexico in 1810 and Ireland in 1921. Ireland's economy did not experience fast growth
between the 1920s and the 1950s because of anticolonial policies based on the since-
discredited strategy of import substitution industrialization. However, since the 1950s,
Ireland used its state's capacity built in the previous period and adopted industrial policies to
gradually open up to global markets to attract FDI, instead of fully liberalizing its capital
markets at once.
Moreover, special government agencies were created to guide and steer such foreign
investment through preferential policies (subsidies) and proper regulations to nurture its
manufacturing sector. Ireland also increased government spending on public education for all
and adopted new tax, fiscal and monetary policies to control high government deficits and
inflation; in addition, it promoted domestic investment and targeted its exports to Europe and
the U.S.
On the other hand, Mexico was a far more open economy than Ireland between the 1920s and
1970s, but Mexico lacked sufficient government effort and discipline to build its state
capacity to steer the economy. Mexico's exposure to international oil markets as an oil
exporter, as well as the rapid expansion of public debt in the 1970s, made the economy
susceptible to more liquid short-term capital flows, instead of longer-term foreign investment.
Its large government debt became very expensive after the interest rates in the U.S. were
increased drastically to curb inflation, pushing the Mexican economy into default and
prompting a large currency devaluation.
 CONCLUSION AND SUGGESTIONS

In 2019, we expect the Indian economy to continue to be the global outperformer in terms of
economic growth and have pencilled in 7.2% for this calendar year. Growth will be supported
by favourable fiscal and monetary policies. Nevertheless, there are substantial downside risks
to our outlook as well, such as an defeat of PM Modi‘s BJP in the general elections due in
May, an escalation of the trade tensions between China and the US and a more rapidly
cooling down of the global economy than expected.
Although the initial talks between the US and China about trade in January have started on
the right footing, we expect that both countries won‘t be able to forge a more structural deal.
Ultimately, China will not able or willing to meet US demands to structurally reform its
economy and open up sectors to foreign competition, which will be disastrous for China‘s
inefficient state-owned companies. In our baseline we already have incorporated a breakdown
of the talks at some point and expect the current protectionist packages to remain in place and
even expanded somewhat. This situation is already costing India 0.6ppts of growth in total up
to 2024.
We already have pencilled in a sufficient economic slowdown in the US in 2020, which puts
a brake on world trade and global growth. However, European data in the last couple of
months has been weaker than anticipated and there is a risk that the US economy slows
down more than expected as well. In such a scenario, India will also feel the pinch to some
extent, as the economy is not completely invulnerable to shocks in the external environment.

As a second risk, we foresee a continuation of the rebound in oil prices to 68 USD/bbl and a
pickup of inflation in H2 of 2019, although we expect that inflation won‘t be anywhere close
to a breach of the RBI‘s 6% inflation target .As the more dovish MPC will be reluctant to
intervene, we expect a gradual depreciation of the INR against the USD.

If India persists with a lack of reforms to rectify the macroeconomic imbalances, it could
inhibit the country's growth potential. The IMF has estimated India‘s potential growth rate at
a much higher 7½-8½% (IMF 2010), and underpinning optimism over the country‘s medium-
term growth prospects are favourable demographics and significant progress towards
economic liberalisation since the late 1980s. To realise India‘s growth potential, major
structural reforms aimed at improving the investment climate are necessary. In particular,
legislative initiatives concerning land acquisition and mining, tax and financial sector reform
as well as FDI in multi-brand retail, are important for ensuring the sustainability of its high
growth. To mitigate supply constraints and facilitate non-inflationary growth, speeding up
reforms in the power sector is an urgent priority, particularly through better allocation of
domestic coal via pricing and reform of electricity tariffs (IMF 2012). Given recent important
personnel changes in the finance ministry, it remains to be seen if the government will finally
bite the bullet on a host of long-awaited policy measures, thus delivering the crucial structural
reforms needed to restore confidence.
Despite the weakening of growth momentum, inflationary pressures have persisted, driven by
high commodity prices as well as structural demand and supply imbalances. Higher demand
due to shifting dietary patterns and rising household incomes have led to higher food prices,
which are further exacerbated by low agriculture production growth that has averaged less
than 2% per annum in the past decade. In the near term, inflation will remain elevated due to
the upward adjustments in energy prices as well as increases in minimum support prices for
various crops. Inflation expectations are also expected to remain sticky, creating not merely
upside risks to near-term inflation but also likely to lead to a surge in gold imports (which
was a key factor worsening the current-account deficit over the last two years) to hedge
against inflationary pressures. The persistent fiscal deficit and the declining rupee pose
potential threats for further inflationary pressures.
 BIBLIOGRAPHY

Primary source :
Books-
1. Managerial Economics By DN Dwivedi

2. Managerial Economics By GS Gupta

3. Managerial Economics By Yogesh Maheshwari

Secondary source-

Websites-
1. www.investopedia.com

2. www.economicsuk.com

3. www.nakedcapitalism.com