India: The emerging giant in the worldwide economic scene

As recently as the 1990s, much of the world thought of India as an exotic place full of saffron-robed priests, snake charmers, roadside beggars, the fabled maharajahs, and of course the exquisitely beautiful Taj Mahal.

By Anil K. Gupta

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Published: Tue 23 Nov 2010, 5:06 PM

Last updated: Mon 6 Apr 2015, 11:33 AM

What a difference a decade makes. While India’s exotic features remain very much a reality, it is the economic India that occupies much of the world’s attention today.

In this column, I reflect on the factors that have propelled India’s transformation, where the country is headed over the next 10 years, and the challenges that India must overcome if it is to realise the hopes and ambitions of its 1.1 billion citizens.

India today is one of the world’s twelve biggest economies. With a GDP growth rate averaging 7.9 per cent annually during 2000-2008, it has been one of the two fastest-growing large economies, second only to China. A growing body of analysts including Goldman Sachs, Morgan Stanley, and Standard Chartered now predict that India is likely to start growing even faster than China during the next five years and remain the world’s fastest-growing large economy over the next 20 years. These growth rates will also imply that, by 2030, India would have overtaken Japan to become the world’s third-largest economy after China and the United States.

India’s economic transformation began in 1991. Faced with near bankruptcy, the government started dismantling the “licence Raj” which had shackled the private sector by controlling even little things such as the price of soap. This policy shift unleashed entrepreneurship on a scale not seen even in China whose economy remains heavily state-dominated. A second factor that further propelled India’s growth was the country’s global advantage in information technology and IT-enabled services.

Over the last 10 years, India has emerged as the world’s number one destination for outsourcing of not just low-end services such as call centers but also high-end work such as drug discovery, data analytics, financial markets research, and legal services. The third major driver of India’s rapid growth has been a major ramp-up in levels of domestic savings and investment. In the early 1990s, India’s gross capital formation stood at only 24 per cent of GDP. Since then, it has increased steadily and rapidly and now stands at almost 40 per cent of GDP, only slightly smaller than China’s and almost double that of every other large economy in the world.

A growing chorus of analysts now predicts that, over the next 10 years and beyond, India’s GDP will grow at an even faster rate than China’s. Why so? I highlight three main factors.

First, India is now investing in infrastructure at the same hectic pace that China did starting in 1996. During 1996-2005, China spent 8.2 per cent of GDP on infrastructure whereas India spent only four per cent. During the current 5-year plan (2007-2012), India has been spending about 7.5 per cent of GDP on infrastructure. The plans for 2012-2017 are even more aggressive, with the goal of investing one trillion US dollars on infrastructure i.e., at a rate of over nine per cent of GDP. Infrastructure investment will boost GDP growth both directly (as a straight contribution to GDP) as well as indirectly (by ushering in a manufacturing revolution to rival what China has witnessed over the last two decades).

Second, India will benefit from a demographic advantage over China. With a median age of 25 years (versus 34.2 years for China), India’s population is much younger than China’s. As a direct result of its one-child policy, China has now become one of the fastest-aging societies in the world. China’s dependency ratio (i.e., the number of people who are very young or very old divided by the number of those of working age) hit a plateau in 2010 and will keep rising from here onwards for the next 30 years. In contrast, India’s dependency ratio will keep declining during this entire period. These twin trends will lead to not only a slow-down in China’s growth rate but also a pick-up in that of India.

Third, the days of export-driven growth in China’s economy are over. During 2000-2010, China’s exports grew at over 20 per cent annually i.e., twice the pace of growth in world trade. As a result, China’s exports increased their share of world trade from less than four per cent to about 10 per cent, higher than that of any other country. If this trend were to continue over the next 10 years, by 2020, China’s export share would increase to 25 per cent. This is a political impossibility because it would require big importers such as the US and Europe to commit economic suicide — an unlikely scenario. The inevitable slowdown in export growth will trim about two per cent from China’s historical growth rate of about 10 per cent. During the same period, India’s exports are likely to pick up, a direct result of the infrastructure and manufacturing revolution currently underway.

Notwithstanding India’s promise, the path from here to there will not be a bed of roses. It will require the country’s elite (government, media, academics, and other key members of the civil society) to confront and overcome a number of challenges. First, India must invest aggressively in improving the level of education for its young masses. Notwithstanding the fact that India is home to some of the world’s best engineering and business schools, the overall level of adult literacy is pitifully low at about 63 per cent. Bulk of the work here will need to be done by the private sector.

As 3G and 4G wireless technologies get rolled out nationwide and as low-cost tablet computers become as commonplace as a bottle of Coke, there will be unparalleled opportunities for the private sector to bring outstanding self-learning material to even the remotest villages.

Second, the country must confront the scourge of corruption. While corruption always leads to misallocation of resources, in a country such as India, its effect can be particularly nasty — as it leads to massive exploitation of the very poor who have almost no power to pass on the costs of corruption to third parties. Reducing corruption will help reduce the growing wealth-divide in the country, accelerate income generation for the very poor, and speed up the emergence of a large middle class so critical for sustaining a high rate of growth.

Third, India must continue and even accelerate the pace of the infrastructure and manufacturing revolution currently underway. IT- and IT-enabled services will remain a niche (though highly prestigious) segment of India’s economy. The only way that India can create higher–paying jobs for its 700 million strong labour force will be by becoming a manufacturing powerhouse in the same league as today’s China. These are huge challenges. However, none of them is insurmountable.

Anil K. Gupta is the INSEAD Chaired Professor in Strategy at INSEAD and the coauthor of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

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