Atanu Dey On India's Development

The High Cost of Living

Burundi comes before Canada lexicographically but Canada leads in all measures of human welfare one could care to compare the two on. I am endlessly fascinated by the contrast between different parts of the world. How on earth did humans end up occupying such widely separated ends of the spectrum of economic development?

Burundi has only 6.4 million people, compared to Canada’s 33 million. But Canada has more land: about 10 million sq kms compared to Burundi’s 0.028 million sq kms. Roughly Burundi has 100 times the population density of Canada. Note however that 35 percent of Burundi’s land is arable, while only 5 percent of Canada is arable. That means, on arable land per capita basis, Canada’s endowment is only 15 times that of Burundi. Not to mention water – Canada has nearly one million sq km covered with fresh water, compared to Burundi’s 2,000 sq km.

Perhaps, one conjectures, that the per capita availability of resources has something to do with the killing sprees that last decades in Burundi, with the Tutsi and Hutus slaughtering each other. It could be nature’s way of redressing the imbalance between people and resources. But I digress.

Canada’s GDP is around US$ 1 trillion and Burundi’s around US$ 0.74 billion. Per capita, Canadians earn about 300 times as much as Burundians. I don’t have an estimate of wealth differentials, but I would guess that Canadians are about 10,000 times wealthier than Burundians. I base this conjecture on the fact that if your income is consistently high over a long period, you end up with lots of accumulated wealth.

Burundi is tiny compared to Canada in terms of wealth and income. The only reason I started comparing them because in the CIA fact book tables, they appear close to each other. India, on the other hand, is not tiny. With nearly 200 times the population of Burundi, India’s GDP is US$ 735 billion. Still India’s GDP is lower than Canada’s even though India’s population is about 30 times Canada’s. Considering that India is about a third of the size of Canada, India’s population density is about 100 times that of Canada. However, around 55 percent of India’s land is arable (compared to only 5 percent for Canada); so per capita arable land in Canada is only 10 times that of India.

India has population/resource imbalance problems, of course, but not as acute as that of Burundi. This could explain at least in part why India is conflict free relative to Burundi. Of course, one cannot discount the pacific nature of the dominant ethic in keeping conflict at bay in India.

If you think about it, of the three countries, Canada is the “cheapest” and Burundi the “costliest” country, with India in the middle. Having lived in California (pretty place but not as cold as Canada) for many years, I often find myself recoiling with sticker shock in India. I find Indian prices totally unbelievable.

But naiveté induced shock is soon reconciled with reason, and it goes thus: of course, India is expensive. That is just another way of stating that people in India are poor. You are poor if you cannot afford stuff. Which means that the prices you face are too high for you to buy stuff. Therefore you are poor. Simple enough but misunderstood by many reasonably bright people.

I keep hearing “India is cheap” from people who are going around comparing some Indian prices while carrying US dollars in their pockets. But Indians don’t carry around dollars. They carry Indian rupees when they go to the market. To an American some stuff (and only some stuff) may be cheap in India. But then if the American is Bill Gates, everything is cheap. It is not the subjective experience of a person that I am concerned with here. I am concerned with whether the prices that a person faces in India is objectively higher than the prices a person faces in, say, Canada. Since prices one pays translate to costs one bears, it is important to measure costs to understand what it means that India is more costly than Canada.

I think I have figured out an objective measure of the cost of living. I will present that the next time.

[Continued in Part 2.]

  • http://spaces.msn.com/members/gopalms/ SloganMurugan

    Within India, if you compare the states, I ‘m sure that you will find some interesting insights :)

  • Sanjay

    Compare the cost of food to income for the US(eventhough food production is subsidised) and India. Compare cost of electronics between India and the US. Until a year back, stuff here was was way overpriced compared to that in the US.
    Compare cost of cars. The US has a well established 2nd hand car market. In India, it is still in its infancy. Cost of a good education. There are many areas I can think of where India is costlier compared to the US or other countries.

  • harsha

    I also wonder why lesser souls console themselves looking at PPP terms, when trade happens at real exchange rates.

  • http://kautilyaa.blogspot.com Ishani

    Given an aggregate bundle of goods, purchasing power parity may be weaker in India. However, a poor American would find certain things more expensive than a poor Indian. Two examples come into mind immediately. Vegetables and fruit perhaps a consequence of more arable land in India. Another one is labor costs say, to fix a broken TV. In America, you are probably better off buying new electronics rather than getting them fixed.

  • Tim

    “I think I have figured out an objective measure of the cost of living. I will present that the next time.”

    You mean there wasn’t one already? What about “purchasing power” or “purchasing power parity”?

    As an American from a small town currently living in the Tokyo area, I’m quite sure that Japan is more expensive than the US for most products, and certainly for real estate.

  • Harsha

    The entire concept of PPP looks irrelevant to me except to console ourselves that we are 4th or 5th in PPP terms when trade happens at real exchange rate.

    Prices adjust themselves by underlying demand and volume.

  • http://cosmicelevator.blogspot.com deep

    “Perhaps, one conjectures, that the per capita availability of resources has something to do with the killing sprees that last decades in Burundi, with the Tutsi and Hutus slaughtering each other.”

    Bingo! I have long believed that violence in Africa (of the type you are describing) has its roots in competition for scarce resources. I am waiting for political economy models to bear out my intuition. Perhaps they already have, and I am not aware of their existence.

  • Venkat Ramanan

    Hey Atanu!
    You have analysed yet another point that I often used to think about! I think, in India, some of the costs are artificially inflated ones. I am not able to classify which one are and which ones are not, but my observation. For eg., A bottle of Benadryl, a cough syrup costs around Rs. 40/- (around a dollar). And, this is a syrup recommended by doctors even for kids! How could poor who live on $1 per day afford this one dollar drug? This is where our netas and babus brought in subsidy and also corruption with it [:)]

  • http://parvativetri.blogspot.com Parvati

    Delightfully interesting. Let’s wait for the coming post on the objective measure of the cost of living…

  • http://www.retributions.blogspot.com confused

    Delightful analysis.

    When I was in India recently, I went to a pub and even in dollar terms it was expenesive. Infact, some of the beer were actually more expensive than USA!!!

    Its not as simple as saying we are a poor country so the cost is higher…over regulation and surfeit of taxes are responsible for putting things beyond ordinary Indians. Just one example-even with the advent of low cost airlines, air travel is more expensive in India. Reasons, expesnive ATF. Petrol is another such example.

  • http://ruralindia.blogspot.com Malapati Raja Sekhar

    I too felt same when I found Japan is cheaper when I compared with Bombay prices. Staying in a hotel of Bombay is more expensive
    (in terms of dollars) than staying in Kobe near Sanomiya railway station (Japan).

  • http://uspeed.blospot.com sudeep

    If there are’nt enough resources to support a communities consumption, there will necessarily be conflict. If the competition for resources is bad enough, this conflict will perhaps even turn violent. This is a given.

    At the same time, I think you also need to account for skills in the resources available to each country. A human unskilled in opearating machinary has less resources than one who does. A conglomeration of humans skilled in secondary, tertiary (I think I am inventing terms as I type) and even more sophisticated skills will have more resources (or value ?) than a group with abysmal per capita skill levels.

    I think your comparison of Canada/Burundi/India’s land mass, arable area, water supplies etc – while illustrating a point, misses a whole lot of other kinds of wealth.

  • Pardeshi

    Atanu,
    Regarding Burundi and Rwanda,the problem has roots in the European colonization of Africa.Wars were scarce in these countries before.The Germans and Belgian subjects were responsible for classifying the natives into castes and tribes depending on their activities and on questionable superiority of some physiological and facial appearance over others.Even the “peace loving religions” have participated in that.The citizens even after independance stick to Tutsi and Hutu ethnicity.The only reason for mass murder is the thirst for power.You can’t expect much development in such conditions

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  • Jayakumar

    Just saying something only slightly related: I’ve found, that Gurgaon for example has electronics ( I mean things like harddrives, usb thumbdrives, graphics cards, etc) prices that are in many cases nearly 300% more expensive than Malaysia, Singapore and USA. A side rant, don’t you wish, more stores would advertise their prices online like http://www.lowyat.net/v2/images/pdf.gif , http://www.lowyat.net/v2/pricelist/cycom_notebook.pdf .

    Anyway, I guess it just shows that we’ve still got a long way to go in growing our markets for lots of goods.

  • Loknath

    Hi Atanu,

    The PGTEC based approach is a fantastic and fool proof inidcator of what “being rich and poor” means across the globe. Another one that i followed was Big-Mac index but it is far from accurate. I always envied (though as a patriot and US baiter ) why the hell God give America so much, but like every rational being i justify for a moment that if not richer, i am happier.. i have family, friends and peaceful life and dal-roti..and crap. but one thing can sure be concluded.. we have been slaves for centuries.. of our rulers and our elected governments. no one ever emphasized such comparisions in public..may be our legislators are scared to put these facts honestly.As usual successive governments have believed in keeping us in dark with as little education as possible. May i request you to make a relative PGTEC table with India as 100. I am sure (without complete facts as of now) that India will still be amongst the bottom 20 poorest countries in the world. The progess which the country has seen in terms of income and employment and globalization et al in the past 10 years has happened by default. left to the same semi-literate bastards (who always got relected), this would have only become worse.At least we can buy pizza’s and apartments, cars and education on emi’s now, again at interest rates atleast thrice that in USA.

    Keep posting these feel-bad and good comparisions and send some copies to our ministers-PC, MMS et al , if possible.Even they have would have never thought on these lines. PC is always happy to see sensex soaring (though FII’s make 50% of the money)for which he doesn’t leave a chance to take credit…he is one arrogant b*****d

    L

  • http://www.mankindpharma.com kanchan kaushik

    It is surprising that indians purchase things at higher rates and call it a poor country but actually we ourselves are responsible for this high and unaffordable prices.