PPP Makes India Third Largest Economy in the World

The full form of PPP is Purchasing Power Parity, the rate at which one country’s currency must be converted into another country’s currency to buy the same quantity of goods and services in both countries.

What is the global economy’s pace of expansion? Is India a bigger contributor to global economic growth than China or the US? These are the questions that academics and economists are engaged in, and it would appear rational to assume each has a simple answer at first glance. The reality is entirely different.

One must evaluate the output values of various countries to find answers to these questions (i.e., each country’s statistics must be transformed into a common currency).

Example of PPP Comparison

The number of units of a country’s currency necessary to buy the same quantity of goods and services in the domestic market that a US dollar would buy in the US is known as the purchasing power parity conversion factor.

Let’s imagine a garment from a particular brand costs $20 in the United States. In India, the same garment costs ₹500. To create a logical comparison, we must first convert the $20 into rupees, which, at the present exchange rate, equals ₹1500.

A 100 Mbps residential Internet package in Dubai, for example, costs AED 749 per month, while an equivalent service in India costs ₹824 per month, including taxes. 20 Indian rupees are equal to 1 AED. This indicates that Internet charges in Dubai are 18 times higher than in India.

Similarly, buying recently released mobile phones in Dubai is less expensive than in India.

A basket of goods and services is used to calculate the purchasing power parity of two currencies, such as rent, groceries, travel, entertainment, fuel, and clothing.

India’s purchasing power parity (PPP) was 22.45 local currency units (LCU) per global dollar in 2020. The official INR/USD exchange rate is 76 rupees for the international dollar.

It indicates that in India, you just need ₹22.45 to purchase the same products that would cost $1 in the US, rather than ₹76 because living costs are cheaper. It means that with 1 dollar equivalent rupees in India, you could purchase 76 divided by 22, or 3.5 units of the same goods or services.

It can be stated that India has a cheaper cost of living. In India, a similar number of goods can be purchased for a lower price than in the United States.

To put it another way, producing goods and services in the United States is more expensive than in India or China. The basic wage rate in the United States is $7.25 per hour or roughly ₹13,000 per day. The minimum wage in India is between ₹150 and ₹190 per day. This is why a large number of labour-intensive industrial industries have relocated to China from the United States. Importing from China is less expensive than producing it in the United States.

When PPP is 22 LCU per international dollar, the same basket of products and services would cost 3.4 times more to produce in the United States than India. As a result, the value of India’s output, i.e., its Gross Domestic Product (GDP) of $2.62 trillion, is equivalent to $8.9 trillion (2.6 x 3.4) in PPP terms. On a PPP basis, China tops the list of GDP, followed by the United States and India.

Individuals might use PPP as a benchmark when negotiating pay for international job offers. If you earn ₹10 lakh per year in India, you should aim for no less than $45,333 in the United States, which is ₹34 lakh when converted (10 x 3.4).

India’s Place in terms of PPP in the World

India’s position in PPP remained the third-largest economy in 2017, trailing only China and the United States. The rupee per dollar PPP at the GDP level increased to 20.65 in 2017 from 15.55 in 2011. The dollar to rupee exchange rate increased to 65.12 from 46.67 during the same period.

In addition, the Price Level Index (PLI), which compares the price levels of countries by comparing the ratio of a PPP to its equivalent market exchange rate, increased to 47.55 in 2017 from 42.99 in 2011.

In 2017, India maintained and strengthened its global position as the third-largest economy, accounting for 6.7 percent ($8,051 billion out of a total of $119,547 billion) of world GDP in terms of PPPs, compared to 16.4% and 16.3%, respectively, for China and the United States.

Under the International Comparison Program (ICP), the World Bank has produced new PPPs for the reference year 2017, compensating for differences in living costs among economies worldwide. In the 2017 cycle of the ICP, 176 economies worldwide took part.

Purchasing Power Parity India Rank 2021

In 2021, India will remain the world’s third-largest economy in terms of purchasing power parity. In purchasing power parity terms, India’s GDP was estimated to be $9.266 trillion at the end of 2021. World Economics has created a database that shows GDP in Purchasing Power Parity terms, with estimates for the size of the informal economy and revisions for GDP base year data that are out of date. India’s GDP is estimated to be $15.372 trillion by World Economics, which is 66 percent more than official projections.

Conclusion

Purchasing Power Parity (PPP) is a well-known macroeconomic measure that uses a “basket of products” technique to compare the currencies of different countries. Economists can compare productive capacity and living standards between countries using PPP. Some countries adjust their Gross Domestic Product (GDP) calculations to reflect PPP. In terms of purchasing power parity, India is the world’s third-largest economy (PPP)