India is ranked 6th by GDP, but 3rd by GDP on PPP basis: why?

India is the sixth largest country in terms of Gross Domestic Product. The country reported a GDP of $2.6 trillion for 2020, according to International Monetary Fund data. The United States has the highest GDP ($20.9 trillion), followed by China ($14.7 trillion) and Japan ($5.0 trillion).

Top 10 countries by GDP

Source: World Bank

In terms of GDP by purchasing power parity (PPP) basis, India is ranked 3rd in the world with $8.9 trillion. China is ranked one with $24.3 trillion, while the USA is ranked 2nd with $20.9 trillion.

Italy, Canada and South Korea which occupy 8-10 rank amongst countries by GDP do not find a place in the GDP by PPP basis. Russia (6), Indonesia (7) and Brazil (9) who are not in the Top 10 list of GDP make it to the list of GDP by PPP basis.

Essentially all the BRICS countries except South Africa are part of the Top 10 GDP countries by PPP basis.

Top 10 countries by GDP (PPP basis)

Source: World Bank

GDP by PPP basis

Purchasing power parity is a popular metric used to compare economic productivity and standards of living between countries.

Purchasing power is the value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

GDP refers to the total monetary value of the goods and services produced within one country.

GDP by PPP basis attempts to convert GDP into a number more easily comparable between countries with different currencies.

Purchasing power parity conversion factor is the number of units of a country's currency required to buy the same amounts of goods and services in the domestic market as the U.S. dollar would buy in the United States.

For example, let’s say a shirt of a particular brand costs $10 to buy in the US. The same shirt costs Rs 500 in India. To make an apples-to-apples comparison, we must first convert the $10 into rupees, that will be Rs 750 at current exchange rate.

In other words, for every $1.00 spent on the shirt in the US, it takes just $0.67 to obtain the same shirt in India with Indian rupee. For $10, in India one can buy 1.5 such shirts. It can thus be concluded that the shirt is cheaper in India.

In another example, a 100 mbps home Int,ernet package in Dubai costs AED 749/month while a comparable plan in India would cost Rs 824/month including taxes. 1 AED is equal to 20 Indian rupees. This means the Internet charges are very expensive in Dubai compared to India: 18 times.

A plate of mini idli in Dubai costs AED 12 at Sarvana Bhavan. Same dish at Connaught Place at the Saravana Bhavan in Delhi costs Rs 160. This means having idli at the same restaurant in Dubai will cost 50% more than having it in Delhi.

Similarly, it is cheaper to buy newly launched mobile phones in Dubai than in India. Many people ask friends and relatives to buy for them and bring them along during holidays.

The purchasing power parity for two currencies is calculated using a basket of goods and services - rent, groceries, travel, entertainment, fuel, clothes etc.

In 2020, the purchasing power parity for India was 22 local currency units (LCU) per international dollars. The official exchange rate between INR and USD is 75 rupees per international dollar.

It means in India you just need Rs 22 to buy the same goods / services you could buy for 1 dollar in the US and not Rs 75 as the cost of living here is lower. It means you could buy 75 divided by 22, i.e 3.4 units of the same goods / services with 1 dollar equivalent rupees in India.

It can be concluded that the cost of living is lower in India. One can buy the same quantity of goods at a lesser price in India compared to the USA.

To put it another way, it is costlier to produce goods and services in the USA than in India or China. The minimum wage in the USA is $5.15/per hour which translates to around Rs 3,000/per day. In India the minimum wage is in the range of Rs 400 to Rs 500 per day.

This is the reason why labour intensive manufacturing industries have moved to China from the USA in a big way. It is cheaper for the USA to import from China than to manufacture it locally.

The same basket of goods and services would cost 3.4 times more to manufacture in the USA than India when PPP is 22 the LCU per international dollar.

Hence the value of output of India, that is, GDP of $2.62 trillion is equal to $8.9 trillion (2.6 x 3.4) on a PPP basis. China tops the list of GDP on a PPP basis followed by the USA and India.

PPP can also be used as a benchmark by individuals while negotiating salaries for offers abroad. If you are earning rupees 10 lakh per year in India, you should normally aim for nothing less than $45,333 in the USA, which when converted is Rs 34 lakh (10 x 3.4).