Why Bangladesh has left India far behind

Just 14 years ago, in 2007, the per capita income of Bangladesh was half of that of India. And last year, it surpassed India. The second decade of the millennium has been a golden one for Bangladesh, which the rest of the emerging market economies can only envy. Remember, in 2010, the world was still trying to recover from the crash-landing of Lehman and the unleashing of a global financial crisis. A year later, the European economies were hit by a crisis of sovereign debt, which might have spilled over into a full-blown banking crisis. As if that wasn’t enough trouble for the global economy, in 2013 we had the famous episode of the ‘taper tantrum’. The word ‘taper’ was uttered rather casually by Ben Bernanke, chairman of the Federal Reserve Bank of the US, to indicate that the huge monetary expansion in the wake of the Lehman crisis, should now be “tapered”. Mind you, he said taper, ie, only reduce the enormous pace of expansion of money supply.

This mere word sent the world’s financial markets into a spasm, and capital flowed out of emerging market economies in sudden panic. India was counted as one among the “fragile five” economies. Our exchange rate dropped, inflation was in the double digits, interest rates spiked and bank loans were turning bad in big numbers. Bad news for the macroeconomy all round; and to cap it all, was a series of corruption scandals which really soured the mood of investors. Soon after, a new government took office in India, the exchange rate stabilized and foreign money started flowing back in, although in 2016, demonetisation was another avoidable disruptive negative shock. Since then, we’ve had the rollout of the Goods and Services Tax, a new insolvency law and a bunch of other reforms. But the fact is that for the last five years, India’s economic growth rate has continuously declined, and the Covid year has made it go into a deep recession.