How Economies are Classified?

There are numerous classifications to categorize economies based on their economic development. The most popular classification is the one designed by the World Bank where the economies are categorized into different income groups in terms of their per capita income. World Bank classification also helps us to understand the size and importance of Indian economy compared to other economies while taking the criterion of per capita income.

World Bank classification is widely followed as an evaluation criterion for economic development.

The World Bank adopts classification of countries based on GNI per capita income using the Atlas method. Remember, per capita income is the average income obtained by a resident. The per capita income is considered to be the best quantitative indicator to measure development in terms of monetary units though indicator like Human Development Index measures qualitative development and is used for other purposes.

Income groups in terms of Per capita income

As per the World Bank classification of economies in terms of their per capita income, countries are divided into four groups:

1. Low Income Economies
2. Lower Middle-Income Economies
3. Upper Middle-Income Economies and
4. Higher Income Economies.

There are 189 World Bank member countries, with populations of more than 30,000. For operational and analytical purposes, economies are divided into income groups. Here, the World Bank follows the Atlas method to calculate gross national income (GNI) per capita. For 2019 fiscal year, the GNI per capita for 2017 is followed. The income classification norm for 2019 is shown in the following table.

Table: World Bank’s classification of economies for 2019

Source: World Bank

Here the groups are: low income, $995 or less; lower middle income, $996–3,895; upper middle income, $3,896–12,055; and high income, $12,056 or more.

Table: Per capita Income status: World Bank 2019

Lending groups under World Bank

The practical importance of this classification is that the World Bank gives its assistance to countries based on this PCI classification of countries. Low income economies get concessional loans from the International Development Association (IDA) whereas economies with higher income gets loans from IBRD. For some economies there is a blend category that is given to countries who are in a transition period from IDA to IBRD. For example, Pakistan comes under blend category.

The effective operational cut-off for IDA eligibility is $1,145 (US$1,875 as the historical ceiling for IDA eligibility). IDA eligibility means the eligibility to get concessional rate or low interest rate loan from the World Bank.

Classification of South Asian Economies and their lending category

The following table shows the per capita income of South Asian Economies and their respective lending category.

Table: South Asian countries – per capita income, income category and lending status

Source: World Bank

India under the World Bank classification

From the table it is visible that India, with a per capita income of $1800 belongs to the lower middle-income category. India stands at 146 (PPP Ranking 124^th) among a total of 190 countries; lower ranked than countries like Sudan, Indonesia etc.

India’s per capita income ($1800 in 2017- atlas method) is just around 2 per cent of the per capita income of Switzerland ($80560). Though our economy is the third largest economy in the world in terms of PPP, in terms of per capita income, the country comes among the low ranked economies.

In the case of World Bank assistance, as a lower middle-income country, India can’t get the concessional loans from IDA; rather has to avail loans from IBRD as the economy has the capacity to avail loans from various financial markets. Afghanistan and Nepal get the concessional IDA assistance.

Maldives is the only Upper Middle-Income country from South Asia with a per capita income of $9760.

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