killingfrenzy
FULL MEMBER
New Recruit
- Joined
- May 31, 2011
- Messages
- 3
- Reaction score
- 0
India is catching up with China after a slow start. China's economy opened up in 1978 and has witnessed phenomenal success.
India, by contrast, only opened up its economy after the crisis of the early nineties. But, for much of the first decade, little happened. So, the reality is that India's economic transformation only really took off around the turn of the century.
This was some 20 years after China, although India's starting position was probably somewhat better. Yet, particularly in the eyes of the world, it leaves India with much to do. The good news is India is making progress.
Whilst China's USD 6 trillion economy has overtaken Japan to become the world's second-largest, the USD 1.7 trillion Indian economy, the 10th largest, has recently enjoyed rapid growth.Moreover, it has the ability to grow faster and catch-up with China over the coming decades. But this requires not just more of the same; it will mean over-coming some big challenges as well as continuing to unlock the country's huge potential.
These developments should be seen in the context of a global economy that is enjoying its third Super Cycle. A super cycle is a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world. The first super cycle was from 1870 to 1913 and saw the emergence of the USA as a super-power. The second, from 1945 to 1972, saw the emergence of Japan and rapid global growth.
In this super cycle, China could displace the US by 2020 as the world's major economy. Yet, India is likely to grow at a faster pace than China over coming decades. I would expect trend growth of 6.9 percent for China and 9.3 percent for India, over the next twenty years, allowing for set-backs along the way.
The implications are huge. By 2030, India could be 8.4 times bigger than today. China would be four times bigger; the EU and US 1.7 times larger. By then, India would be the world's third-largest economy. Within India, there is often a hesitation in acknowledging that the economy could grow at a faster pace. Often, consensus views about India's growth potential turn out to be too pessimistic.
Perhaps it is because, on the ground, the challenges are all too apparent. Yet, despite this, the economy has continued to do well. If anything, my 9.3percent projection for average Indian growth until 2030 may be too low.
Trend growth could even be nearer 12-13 percent per annum. India has many features to enable it to emerge as a winner in the super-cycle. The winners will be those countries which have one or more of the three C's: cash, commodities, or creativity. India may not have the cash or commodities, but it has creative potential in abundance.
However, this high growth path is not India's destiny, as there are challenges ahead that require urgent policy actions. Whichever country one focuses on, the outcome depends on the interaction between policy, the fundamentals and confidence.
For India, the policy framework will be particularly important. India needs to overcome its regulatory burden and address its infrastructure needs. The initial focus, perhaps naturally, is on its hard infrastructure, such as its transport system and its energy infrastructure.
But its soft infrastructure is also key, with the need to see continued improvement in education, healthcare and skills, as it provides a sizeable educated labour force for its private sector to grow. India's population is rising, and over the next 20 years the working-age population should increase by over 200 million.
In contrast, China's working age population will rise 4 million over the next decade and contract by 51 million in the following decade. By 2020, the average age in India will be 29 years compared with 37 in China and 48 in Japan. With half its huge population under 25, India has a demographic dividend - but only if it delivers the policies and economic growth needed. I think it will. Productivity could rise rapidly. Manufacturing and service employment will take the place of agriculture.
There will be rapid urbanisation. India's famed entrepreneurial spirit, creativity and its growing pool of English speakers and technical graduates will drive growth in the private sector, helping the economy move up the value curve.
India already has a head-start in IT and software. Other potential sources of growth include tax consulting, financial services, editing and publishing, law, accountancy and design. However, if jobs are not created, a demographic dividend could become a disaster.
Indeed, with that in mind, one significant development this year was India's announcement within its annual budget that it planned to raise manufacturing's share of its economy from around 16% to 25 percent over the next decade. This is crucial for jobs creation.
This points to a growing middle class, key to the sustainability of its domestic consumption-driven growth.
Indeed, India is at a major inflexion point in its economic history. Consider this: it took 33 years for per capita to rise from USD 100 to USD 500 between 1971 and 2004 and only five years for that average to double to USD 1,000 by 2009.
India's macroeconomic and institutional framework, with its flexible exchange rate and an independent central bank which is free to set interest rates is a big positive when compared with China. These attributes have helped offset long-standing concerns about India's high fiscal deficit and government debt.
Moreover, with faster economic growth, tax collections have been rising more than the growth in government spending, while privatisations have helped the government keep deficits in check. Despite a trade and budget deficit, India has the advantage over China of a better balance in its economy - the drivers of India's growth are domestic consumption and investments whereas China's economy is skewed towards exports and investment.
Meanwhile, India's dynamic financial markets, which are some of the most liquid and sophisticated in the world, have enabled the country to absorb and accommodate large capital inflows, whether equity portfolio investments or foreign direct investments.
However, bond markets need to be deepened and broadened further if the country is to successfully raise the estimated USD 1 trillion required to finance its huge infrastructure needs over the next five years. The authorities need to view the role of foreign money and investment in a positive light, as the economy opens up and the financial sector matures further.
Currently, India has an inflation challenge, to which the central bank is correctly responding by tightening policy.
But in recent years, one-way expectations, as well as the strong economy, have contributed to rising asset prices.
India needs to continue to make effective use of macro-prudential measures to keep its financial sector in check although, like a number of Asian economies, its policy tools and institutions held up well during the crisis. Other challenges to sustainable growth include growing inequalities in income and access to basic social amenities such as housing, healthcare and education. There is also regional disparity, with an increasingly affluent west and south contrasting with a poor hinterland in the east and centre. India also faces resource constraints, including growing scarcity of fresh water.
And there is the increasing vulnerability to rising energy prices which puts added pressure on India's trade deficit and its national budget which is burdened by fuel, food and fertiliser subsidies. Maintaining social stability in the midst of such challenges will be key in the coming years. India's democracy with its three million elected representatives, sometimes seen as a hindrance to economic development, may now start to be a real benefit.
This is notwithstanding the need to address corruption challenges highlighted over the last year. It's legal and property rights should also emerge as benefits, including the enforcement of intellectual property rights. Good economics can also be good politics in a democracy. People are seeking policies that generate jobs for India's young population.
This is forcing politicians to deliver change. India's growing domestic market, its demographics, strong democratic institutions, record of stable macroeconomic management, deep financial markets and a growing, more productive and creative workforce provide an opportunity to catch up China and regain India's prominent position in the world economic order. India is both tomorrow's story and today's opportunity.
*Dr Gerard Lyons is Chief Economist and Group Head of Global Research at Standard Chartered Bank.
India, by contrast, only opened up its economy after the crisis of the early nineties. But, for much of the first decade, little happened. So, the reality is that India's economic transformation only really took off around the turn of the century.
This was some 20 years after China, although India's starting position was probably somewhat better. Yet, particularly in the eyes of the world, it leaves India with much to do. The good news is India is making progress.
Whilst China's USD 6 trillion economy has overtaken Japan to become the world's second-largest, the USD 1.7 trillion Indian economy, the 10th largest, has recently enjoyed rapid growth.Moreover, it has the ability to grow faster and catch-up with China over the coming decades. But this requires not just more of the same; it will mean over-coming some big challenges as well as continuing to unlock the country's huge potential.
These developments should be seen in the context of a global economy that is enjoying its third Super Cycle. A super cycle is a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanisation and technological innovation, characterised by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world. The first super cycle was from 1870 to 1913 and saw the emergence of the USA as a super-power. The second, from 1945 to 1972, saw the emergence of Japan and rapid global growth.
In this super cycle, China could displace the US by 2020 as the world's major economy. Yet, India is likely to grow at a faster pace than China over coming decades. I would expect trend growth of 6.9 percent for China and 9.3 percent for India, over the next twenty years, allowing for set-backs along the way.
The implications are huge. By 2030, India could be 8.4 times bigger than today. China would be four times bigger; the EU and US 1.7 times larger. By then, India would be the world's third-largest economy. Within India, there is often a hesitation in acknowledging that the economy could grow at a faster pace. Often, consensus views about India's growth potential turn out to be too pessimistic.
Perhaps it is because, on the ground, the challenges are all too apparent. Yet, despite this, the economy has continued to do well. If anything, my 9.3percent projection for average Indian growth until 2030 may be too low.
Trend growth could even be nearer 12-13 percent per annum. India has many features to enable it to emerge as a winner in the super-cycle. The winners will be those countries which have one or more of the three C's: cash, commodities, or creativity. India may not have the cash or commodities, but it has creative potential in abundance.
However, this high growth path is not India's destiny, as there are challenges ahead that require urgent policy actions. Whichever country one focuses on, the outcome depends on the interaction between policy, the fundamentals and confidence.
For India, the policy framework will be particularly important. India needs to overcome its regulatory burden and address its infrastructure needs. The initial focus, perhaps naturally, is on its hard infrastructure, such as its transport system and its energy infrastructure.
But its soft infrastructure is also key, with the need to see continued improvement in education, healthcare and skills, as it provides a sizeable educated labour force for its private sector to grow. India's population is rising, and over the next 20 years the working-age population should increase by over 200 million.
In contrast, China's working age population will rise 4 million over the next decade and contract by 51 million in the following decade. By 2020, the average age in India will be 29 years compared with 37 in China and 48 in Japan. With half its huge population under 25, India has a demographic dividend - but only if it delivers the policies and economic growth needed. I think it will. Productivity could rise rapidly. Manufacturing and service employment will take the place of agriculture.
There will be rapid urbanisation. India's famed entrepreneurial spirit, creativity and its growing pool of English speakers and technical graduates will drive growth in the private sector, helping the economy move up the value curve.
India already has a head-start in IT and software. Other potential sources of growth include tax consulting, financial services, editing and publishing, law, accountancy and design. However, if jobs are not created, a demographic dividend could become a disaster.
Indeed, with that in mind, one significant development this year was India's announcement within its annual budget that it planned to raise manufacturing's share of its economy from around 16% to 25 percent over the next decade. This is crucial for jobs creation.
This points to a growing middle class, key to the sustainability of its domestic consumption-driven growth.
Indeed, India is at a major inflexion point in its economic history. Consider this: it took 33 years for per capita to rise from USD 100 to USD 500 between 1971 and 2004 and only five years for that average to double to USD 1,000 by 2009.
India's macroeconomic and institutional framework, with its flexible exchange rate and an independent central bank which is free to set interest rates is a big positive when compared with China. These attributes have helped offset long-standing concerns about India's high fiscal deficit and government debt.
Moreover, with faster economic growth, tax collections have been rising more than the growth in government spending, while privatisations have helped the government keep deficits in check. Despite a trade and budget deficit, India has the advantage over China of a better balance in its economy - the drivers of India's growth are domestic consumption and investments whereas China's economy is skewed towards exports and investment.
Meanwhile, India's dynamic financial markets, which are some of the most liquid and sophisticated in the world, have enabled the country to absorb and accommodate large capital inflows, whether equity portfolio investments or foreign direct investments.
However, bond markets need to be deepened and broadened further if the country is to successfully raise the estimated USD 1 trillion required to finance its huge infrastructure needs over the next five years. The authorities need to view the role of foreign money and investment in a positive light, as the economy opens up and the financial sector matures further.
Currently, India has an inflation challenge, to which the central bank is correctly responding by tightening policy.
But in recent years, one-way expectations, as well as the strong economy, have contributed to rising asset prices.
India needs to continue to make effective use of macro-prudential measures to keep its financial sector in check although, like a number of Asian economies, its policy tools and institutions held up well during the crisis. Other challenges to sustainable growth include growing inequalities in income and access to basic social amenities such as housing, healthcare and education. There is also regional disparity, with an increasingly affluent west and south contrasting with a poor hinterland in the east and centre. India also faces resource constraints, including growing scarcity of fresh water.
And there is the increasing vulnerability to rising energy prices which puts added pressure on India's trade deficit and its national budget which is burdened by fuel, food and fertiliser subsidies. Maintaining social stability in the midst of such challenges will be key in the coming years. India's democracy with its three million elected representatives, sometimes seen as a hindrance to economic development, may now start to be a real benefit.
This is notwithstanding the need to address corruption challenges highlighted over the last year. It's legal and property rights should also emerge as benefits, including the enforcement of intellectual property rights. Good economics can also be good politics in a democracy. People are seeking policies that generate jobs for India's young population.
This is forcing politicians to deliver change. India's growing domestic market, its demographics, strong democratic institutions, record of stable macroeconomic management, deep financial markets and a growing, more productive and creative workforce provide an opportunity to catch up China and regain India's prominent position in the world economic order. India is both tomorrow's story and today's opportunity.
*Dr Gerard Lyons is Chief Economist and Group Head of Global Research at Standard Chartered Bank.
