India Poised, But vs. China?

I was excited by the most prominent top headline on January 24 in ‘Times of India’, ‘India to overtake US by 2050′. Goldman Sachs’ research arm in a global research paper has scaled up estimates of the country’s prospects in its October 2003 research paper widely known as the BRICs report. Productivity growth will help India sustain over 8% growth until 2020 and become the second largest economy in the world, ahead of the US, by 2050. India’s growth acceleration since 2003 represented a structural increase rather than simply a cyclical upturn. Productivity growth drove nearly half of overall growth and expected it to continue for some years.

”We project India’s potential or sustainable growth rate at about 8% until 2020. The implication is that India’s contribution to world growth will be even greater (and faster) than implied in our previous BRICs research,”

The original report had projected that India’s GDP would outstrip Japan’s by 2032 and that in 30 years, it would be the world’s third largest economy after China and the US. The new report goes one step further by moving India up from No. 3 and No. 2 in the global sweepstakes of tomorrow. A turnaround in manufacturing productivity was central to the ratcheting up of productivity growth. The private sector was the principal driver of this turnaround, as it improved efficiency in the face of increased competition due to the cumulative effects of a decade of reforms.

Average tariffs have fallen to below 15% from as high as 200% as India began to reintegrate with the global economy. The impact of opening up has been significant. Exports have risen 14 times as India has rapidly gained trade share. This development has been most evident in the past 3 years, when trade has grown, on an average, 25% a year.”

Productivity in industry and services is more than four times that in agriculture, which employs nearly 60% of the labour force

Since 2003, there has been a structural increase in potential growth to nearly 8% from 5%-6% in the previous two decades

From 2007 to 2020, India’s GDP per capita in US$ terms will quadruple (a third higher than the original BRICs projections).

Indians will also consume about five times more cars and three times more crude oil as compared to 3.5 times more motorcars and 2.3 times more oil estimated by Dominic Wilson and Roopa Purushothaman in October 2003.
More than 100 million people are estimated to enter the labour force by 2020

India has 10 of the 30 fastest-growing cities in the world and is witnessing rapid urbanisation.

140m rural dwellers will move to urban areas by 2020, while 700m people will urbanise by 2050

But ”India will have to educate its children and its young people (especially its women) and it must do so in a hurry. Lack of education can be a critical constraint to the growth of the knowledgebased IT sector, as well as in the move to mass employment in manufacturing. The demographic dividend may not materialise if India fails to educate its people.”
(The President’s confirms the prediction.)
While I was happy with this report, an article by Shankar Acharya, ‘Only one new Giant for now?’ Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India gave me the running commentary of India’s status in global economic race.

India has been a gradual “globalizer”, China’s surging development has been far more intensively based on global trade and capital flows. China’s integration with the world economy has accelerated sharply over the five years 2000 to 2005, as well as the much milder rise in India’s international economic integration. For example, China’s goods exports increased by an amount, which was five times India’s total goods exports in 2005. During these scant five years China’s share of world exports jumped from 3.9 to 7.3 per cent, while India’s share rose sedately from 0.7 to 0.9 per cent. The increment in inward FDI flows into China was seven times total FDI inflow into India in 2005. Similarly, the increase in oil consumption in China was almost equal to India’s total oil consumption in 2005. Aside from the dominant factor of China’s full-blooded embrace of global opportunities (compared to the much more hesitant policy stances adopted by India) there are several other reasons which explain these strikingly different outcomes. First, over the last 25 years, China’s per capita growth rate has been about double India’s, around 8 per cent as compared to 4 per cent. So, depending on how you measure it, today China’s economy is perhaps two and a half times as large as India’s.

Second, India’s growth has been propelled more by domestic consumption than external demand as compared to China. Third, China’s growth has been powered much more by the rapid growth of industry, especially labour-intensive manufactured exports, while in India the growth of services (mostly non-tradeables) has been more dominant. (It is a striking fact that the share of manufacturing in GDP in 2004 was only 16 per cent in India as compared to nearly 40 per cent in China.) Even in services, China’s total services exports exceeded India’s in 2005 and the increment over 2000 was comparable in absolute terms, though the rate of growth was lower. The one area where India has displayed China-type growth rates is software exports, which quadrupled from about $6 billion in 2000-01 to $24 billion in 2005-06. But even in 2005-06 the IT/ITES sub-sector accounted for less than 3 per cent of India’s GDP and employed about 1.3 million workers directly (and perhaps double that number indirectly). By itself this sector cannot be expected to transform India’s economy and employment profile.

It is only fair to acknowledge India’s development as simply lagging China’s by 10 to 15 years. Barring unforeseen political or economic turmoil, in the next ten years the global economy will have to contend with only one new burgeoning “giant”.

And that is my agony as well as the challenge for all Indians. I wish the politicians also would have been with the rest of the Indians.

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