Purchasing Power Parity and the size of Indian Economy

Topic

Purchasing Power Parity and the size of Indian Economy

 

Context
The World Bank has released new Purchasing Power Parities (PPPs) for reference year 2017, under International Comparison Program (ICP), that adjust for differences in the cost of living across economies of the World. Globally 176 economies participated in 2017 cycle of ICP.

About
• The International Comparison Program (ICP) is the largest worldwide data-collection initiative, under the guidance of UN Statistical Commission (UNSC), with the goal of producing Purchasing Power Parities (PPPs) which are vital for converting measures of economic activities to be comparable across economies.
• Along with the PPPs, the ICP also produces Price Level Indices (PLI) and other regionally comparable aggregates of GDP expenditure.
• India has participated in almost all ICP rounds since its inception in 1970.
• The Ministry of Statistics and Programme Implementation is National Implementing Agency (NIA) for India, which has the responsibility of planning, coordinating and implementing national ICP activities.
• India is also proud to have been a co-Chair of the ICP Governing Board along with Statistics Austria for the ICP 2017 cycle.
• The next ICP comparison will be conducted for the reference year 2021.

Results from the 2017 International Comparison Program are as given below
• The Purchasing Power Parities (PPPs) of Indian Rupee per US$ at Gross Domestic Product (GDP) level is now 20.65 in 2017 from 15.55 in 2011.

• The Exchange Rate of US Dollar to Indian Rupee is now 65.12 from 46.67 during same period.
• The Price Level Index (PLI)—the ratio of a PPP to its corresponding market exchange rate—is used to compare the price levels of economies, of India is 47.55 in 2017 from 42.99 in 2011.
• In 2017, India retained and consolidated its global position, as the third largest economy, accounted for 6.7 percent ($8,051 billion out of World total of $119,547 billion) of global Gross Domestic Product (GDP) in terms of PPPs as against China (16.4%) and United States (16.3%), respectively.
• India is also third largest economy in terms of its PPP-based share in global Actual Individual Consumption and Global Gross Capital Formation.

Purchasing Power Parity
• Purchasing power parity is used worldwide to compare the income levels in different countries. PPP thus makes it easy to understand and interpret the data of each country.
• Purchasing power parity (PPP) is an economic theory of exchange rate determination.
• It states that the price levels between two countries should be equal.
• PPP measures are widely used by global institutions, such as the World Bank, United Nations, International Monetary Fund and European Union.

Evolution of PPP in India
• In India, there is no exact date and year which could speak of the beginning of Public-Private Partnership PPP but it is said that the PPP story began with private sterling investments in Indian railroads in the latter half of the 1800s.
• Then again we could follow it to the mid-1900s when private makers and merchants developed in power sector in Kolkata (Calcutta Electric Supply Corporation) and in Mumbai with the Tata playing a prominent role in starting the “Tata Hydroelectric Power Supply Company” in 1911.
• A new wave in Public-Private Partnership PPP was felt when a policy was made by the Central government in 1991 and it was decided to allow private participation in the Power sector which opened up the doors for independent power producers.

• The National Highways Act, 1956 was altered in 1995 to empower private support.
• In 1994, through a focused offering process, licenses were conceded to eight-cell cellular telephone utility administrators in four metro urban areas and 14 administrators in 18 state circles.

Need for PPP in India


1. Better infrastructure: It is a fact that most governments face the problem that public financing is not enough to bridge the gap between infrastructure need and available funds. In this respect, infrastructure development has to rely increasingly on private markets to leverage and mobilize capital.
2. Risk sharing: The private sector is considered to be more proficient in resource acquisition and utilities deliverance than the government, and, therefore, it is further bolstering government’s good fortune to impart the related risks to the private segment.
3. Optimum allocation of resources: PPPs can help in the optimum allocation of public resources for the development of infrastructure.
Though conventional models of public acquirement concentrate on accomplishing the most reduced forthright expenses in conveying infrastructural ventures infrastructural projects, PPPs concentrate on
delivering cost-effectiveness over the duration.
4. Innovations: Development is another imperative idea that the private segment can convey to public utilities. As a rule, people in the public sector may not be as inventive similar to the private area. The private division is constantly hunting down new items and utilities to expand its aggressive edge and to save costs.
5. Aid in growth of other sectors: To the government, PPP frees up fiscal funds for other areas of public service and improves cash flow management as high upfront capital expenditure is replaced by periodic service payments and provides cost certainty in place of uncertain calls for asset maintenance and replacement.
6. The catalyst for the economy: To the private sector participants, PPP provides access to public sector markets. If priced accurately and costs managed effectively, the projects can provide reasonable profits and investment returns on a long-term basis.
7. More employment generation: Development of infrastructure will need manpower at various levels and hence it will generate more employment opportunities for the people.
8. Improves the image of the country: There will be more development of better physical infrastructure and services through PPP and it will create a good impact on tourism and other enthusiast investors.
9. Attract FDI: Scope for investment by the private sector in infrastructure will also provide the opportunities to foreign investors to participate and the financial crunch can be meted out easily. The better infrastructure is also a major boost to foreign direct investment (FDI).

Models in PPP
India majorly follows 3 types of PPP models out of many models available.
They are:

1. Hybrid Annuity Model(HAM)
2. Build-Operate-Transfer(BOT)
3. Engineer-Procure-Construct(EPC)
HAM is a mixture of BOT and EPC where the financing, risks, operations, etc, are distributed between Government and a private partner. The following table would show the difference in these models:

BOTEPCHAM
RiskPrivatePublicPrivate (60%), Public (40%)
FinancePrivatePublicPrivate (60%), Public (40%)
FinancePrivatePublicPrivate
RevenuePrivatePublicPublic

Challenges faced by PPP in India

   1. Construction/implementation risk
      o arising from delay in project clearance
      o contractor default
      o environmental damage.
   2. Market risk
      o arising from insufficient demand
   3. Finance risk
      o arising from inflation;
      o changes in interest rates
      o increase in taxes
      o Change in exchange rates.
   4. Operation and maintenance risk
      o arising from the termination of the contract
      o technology risk

      o labor risk.
   5. Legal risk
      o arising from changes in law
      o changes in title/lease rights
      o insolvency of developer/service provider
      o change in security structure.

Conclusion
The success of Public-Private Partnership PPP to a large extent depends on optimal risk allocation among stakeholders, the environment of trust among stakeholders, robust institutional capacity to undertake grooming and implementation of PPP projects. Further to foster the successful implementation of a PPP project, a robust PPP enabling ecosystem including liquid and diversified financial institutions; sound regulatory and arbitration framework; mature developers and experienced consultants etc. is essential