• Pushkar Singh

India – punching above its weight?

Updated: Sep 12, 2021

India's Wealth per capita is equal to that of Iran despite Iran's per capita GDP being two and half times that of India. How do we explain this?

We often come across newspaper articles on how Apple or Google have become larger than the economies of almost all countries. Although both Apple and Google (and the other tech giants – FAAMG) are massive corporations, they are not bigger than most world economies. The fallacy arises because we compare market capitalisation (market cap) with Gross Domestic Product (GDP).

Market cap is a measure of the net worth (think of it like an individual's wealth) of a company while GDP is akin to the annual income of a country.

Hence, equating market caps with GDPs is like comparing apples and oranges. It is irrational to compare your total wealth (including the value of your house and stock portfolio) with the annual income of your neighbour, right?

But let's keep the market cap of companies aside and examine the net worth of different countries. National net worth or national net wealth (Wealth in this article) is the total sum of a country's assets minus its liabilities (external debt). Annual GDP (GDP in this article) is the sum of goods and services the country produces in a particular year.

Wealth accumulation – slow and steady wins the race

Now we are clear on the definition of wealth, let's see how wealth is created. In most cases, it takes generations to garner wealth. It is interesting to start with a thought experiment. Imagine a situation in which your mother saved a part of her paycheck every year till her retirement to leave you a tidy inheritance. You added to what you got from your mother for 40 odd years and passed on a bigger estate to your daughter. Your daughter carried forward the family legacy and accumulated substantial wealth throughout her working life. As a result, her fortune as a 60-year-old was much greater than your mother's when she was 25. Your family saved for generations to create wealth.

The same logic holds for countries. A country's wealth depends upon the historical income, savings, and investment patterns of its denizens. European countries are wealthier than Asian, African, and South American ones because they have accumulated wealth over the centuries. The Europeans have saved and invested over generations while the rest have suffered from colonialism, poverty, and low growth.

Although saving is critical for wealth, it is just one piece of the puzzle. To draw an analogy, it would help to think of savings like a bag of seeds. Even the best quality seeds can't guarantee a bountiful harvest. The crop also needs water, sun, and nutrients to flourish. Correct investments are the water and nutrients that multiply savings and create wealth. It is difficult to build substantial wealth without investments that don't pay off. The most popular investment types are real estate, equities, gold, and bonds. So a country's wealth depends upon the long-term performance of its property and stock markets. But wealth doesn't always multiply. Sometimes wealth declines because of factors such as high external debt leading to an outflow of money from the country, currency depreciation due to bad economic policies and persistently high inflation. You might save a lot but high inflation can erode your savings.

High economic growth = more wealth

Since it takes decades to accumulate wealth, we can expect Western Europe and its offshoots (USA, Canada, Aus, NZ) to be wealthier than the rest. But GDP also influences wealth because higher GDP implies higher savings. If you earn a million dollars, other things being equal, you will easily save more than someone earning 100,000 dollars.

GDP depends upon several factors – the working population and their skill level, natural resources, investable capital, technology, etc. Without delving deep into the intricacies of GDP, is it logical to infer a large GDP leads to more wealth? Yes, because a great GDP means people have more money to save and invest which leads to more wealth. By the same corollary, a fast-growing country will quickly build immense wealth because the amount of savings is increasing every year. An increase in property and stock prices, a result of high GDP growth acts as a multiplier effect in wealth generation.

How about a better indicator – The wealth to GDP (WG) ratio?

It is folly to analyse a country's wealth without considering its GDP. A country can have X wealth, but if its GDP is 2X, it is not a great sign. It implies the country as a whole is not great at generating wealth. Its citizens are terrible at saving. Hence, I decided to analyse the Wealth to GDP ratio (WG in this article) for each major economy to arrive at some conclusions. The question it begets is what is a good WG? Numbers or matrices in isolation don't tell us much. I thought comparing WG across countries will give us some interesting results. Here are the results of this analysis. But before we start, I should say something about the data I have used.

All wealth numbers used in this report are from The Global Wealth Report 2019 by Credit Suisse and the GDP (Nominal) numbers are from The World Economic Outlook Database 2019 by IMF. I calculated the WG of 50 countries (all major economies) for this analysis. You can download both these reports and the analysis here.

Hypothesis – Rich countries have higher WGs than poor countries

The wealth of the entire world was 360 T (USD Trillion) while the global GDP was 87 T in 2019. Hence, the world's WG stood at 4.1.

Before I started this analysis, my hypothesis was WG of Western Europe & its offshoots (because of old wealth) and Japan, South Korea, & Taiwan (due to rapid economic growth since WW II) will be more than the world average while the WG of other countries will be less than the world average.

The data confirmed my hypothesis but threw up a few surprises. Here is a list of countries with the highest WGs. There are no major outliers although some countries have higher than what I expected.

Countries with highest WGs in 2019

Hong Kong (WG 8.2) comes out on top because thousands of super-rich people live there. Taiwanese have managed to save enormous wealth despite being rich only for a few decades. The Chinese values of prudence and saving are also responsible for the high WGs of Hong Kong and Taiwan. Italy was the first European nation to develop and become rich, and Italians have accumulated immense wealth over the centuries. The next 2 countries are a bit of a surprise. Spain has neither been a rich European country nor has done too well in recent decades. Its GDP per capita is lowest in Western Europe after Portugal. Despite that its wealth per capita ($165,000) is quite similar to that of Germany ($175,000). I can't think of any plausible reasons behind the great wealth of Spaniards which reflects in its high WG.

One clarification is needed before we go ahead with the analysis. Spain's high WG doesn't mean an average Spaniard is richer than an average Brit or French. Wealth per capita or wealth per adult is a better indicator than WG for the wealth of an average person in a country.

A high WG implies the country is richer than what it appears considering its economic performance.

Switzerland's lowly WG of 5.4 astounded me. Switzerland is home to some of the richest people in the world. Its GDP per capita ($83,000) is easily the highest amongst the major economies. I can't think of one reason why the Swiss are not wealthier (even though their wealth per capita at $445,000 is the highest in the world) and why its WG is not similar to that of Hong Kong. All countries in this list, except China, have been rich for decades. Mainland Chinese have created immense wealth because of 2 reasons – epic economic growth and the astronomical increase in property and stock prices over the past 30 years. The absence of Northern European and Nordic countries from this list is intriguing.

Northern Europe – High GDP per capita but low Wealth

Although Austria is not a Northern European country, I have put it here because of its relatively low WG. As apparent from the data, Northern European and especially Nordic countries have low WGs. But even in Northern Europe, we can spot a trend. Countries that developed early have a higher WG than countries that were poor until WW II. Finland, Norway, and Ireland were the last European countries to develop and their low WG reflects that. Finland's GDP per capita is 20% higher than that of the UK and France, but its Wealth per capita is significantly lower. GDP per capita of Norway and Ireland is 80% more than the UK and France while their Wealth per capita is around 20% less.

India – way ahead of its peers

Now we come to the most interesting part of the analysis, something that astounded me. India's GDP per capita is amongst the lowest in the world. An underdeveloped economy and massive population are the reasons behind it. But India's WG is much higher than what we would expect from a country with a low GDP per capita.

India is the only major economy in this income bracket (Nominal GDP per capita below $10,000) with a WG higher than the world average.

I have clubbed Poland, South Africa, and Thailand with India because even though their GDP per capita is greater than that of India, their economic indicators are more similar to India than Western Europe. The extremely low WG of Pakistan (1.6) is a reflection of everything that's wrong with the country. Pakistan's GDP per capita was higher than India's until 1995, but we can see terrorism and wrong economic policies have destroyed its economy and wealth. But Pakistan is not an exception. India's WG is more than twice of Indonesia (1.6) and the Philipines (2.1) – 2 countries that have grown rapidly over the past few decades. Even then they are not wealthy because it is difficult to build wealth in a short period. But Indians have done a commendable job. High WG of India doesn't mean an average Indian is richer than an average Chinese or an average Pole, but it implies Indians are way richer than what their incomes justify. Common Indians have built more wealth than their peers because of their cultural habit of saving for future generations.

India's wealth per capita, at $9,100, is more than that of relatively richer countries like the Philippines ($7,000) and Indonesia ($6,600) and comparable to much richer countries like Iran ($9,200), South Africa ($13,000), Turkey ($16,100), Thailand ($16,600), and Brazil ($16,600).

Don't cry for me Argentina – or should we?

Before I conclude, let's analyse the WGs of Latin and South America. Argentina is the only major economy in the world with a WG of less than 1. Decades of high inflation have eroded the savings of common Argentinians. Disastrous economic policies have added to the woes. Other Latin American economies also have low WGs. Although most of them became independent in the 19th century and have been relatively rich for decades, all of them have low wealth due to military coups, high inflation & external debt, currency depreciation, and credit defaults. Brazil is an interesting case study. Its GDP per capita is four times that of India while its Wealth per capita is just 60% more.

Final Thoughts – Factors that influence wealth

I have ignored demographics for this analysis even though they are critical in understanding the wealth of nations. Young countries like Bangladesh, India, Indonesia, and Pakistan have a low wealth per capita because a large section of their population is not part of the workforce. Wealth per adult is a better indicator for comparison, but that data is not reliable. These young countries will soon get wealthier when the share of their working population increases. So even though WG is not a perfect metric, I chose it because it provides us with an interesting insight – the wealth of a country considering its past and present income.

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