India has "exciting growth potential" but must work harder: Goldman Sachs
Investment bank outlines 10 things for India to improve upon, in order to grow 40 times by 2050
By Sanjay Kapoor
IBTimes India, CA
17 June 2008
Global investment bank Goldman Sachs has suggested that the Indian economy has the potential to grow 40 times bigger by 2050 but it has to work harder to achieve its potential.
According to Goldman Sachs' global research report on 'Ten Things for India to Achieve its 2050 Potential,' the world's second fastest growing economy has the potential to even outgrow the US economy by 2050 provided it pay attention to the following ten fields: [1]
improve governance [2]
raise educational achievement [3]
increase quality and quantity of universities [4]
control inflation [5]
introduce a credible fiscal policy [6]
liberalize financial markets [7]
increase trade with neighbors [8]
increase agricultural productivity [9]
improve infrastructure and [10]
improve environmental quality.
"Delivery of all these and more would ensure strong, persistent, medium-to-long-term growth, allowing India to reach its amazing potential," the report, written by Jim O'Neill, head (global research), Goldman Sachs, and Tushar Poddar, vice president (research), Asia Economic Research Team, Goldman Sachs India, said.
"Without better governance, delivery systems and effective implementation, India will find it difficult to educate its citizens, build its infrastructure, increase agricultural productivity and ensure that the fruits of economic growth are well established," the report said.
At the same time, "raising India's educational achievement is a major requirement to help achieve the nation's potential," the report continued, adding, "A major effort to boost basic education is needed."
However, India must not stop at that. Better quality of higher education is needed and India must also increase the number of universities, which are of world standard, it said.
In the wake of inflation hitting a 7-year high rate of 8.75 percent, Goldman Sachs said it is high time that "formal Inflation Targeting (IT) should become a centerpiece of a clearer, more defined and credible medium-term framework for macroeconomic stability."
"As part of this, greater independence for the Reserve Bank of India (RBI) and the abolishment of all FX (foreign exchange) controls are recommended," it said.
The report also warned that India's fiscal deficit is growing at an alarming rate and the overall government deficit which "stood at just under 6 percent in FY2008," may "accelerate to above 7 percent" in FY2009, "due to a large debt-waiver for farmers, a big wage hike for civil servants, increasing fertiliser and oil subsidies, and higher exemptions on income tax."
The report noted that the Indian government's expenditures are directed towards wages and subsidies instead of being directed towards productive investment like health, education and infrastructure, which could enhance growth. "A medium-term strategy for fiscal policy, which reduces the overall deficit to a sustainable level, is critical for India," the report said, before the "already high government debt...becomes a key source of macro vulnerability."
The report has also suggested that the financial markets in India be liberalized as they are still small and underdeveloped. "The state still dominates the sector, holding 70 percent of banking assets, a majority of insurance funds and the entire pension sector. Additionally, markets are lacking in corporate debt, currency and derivatives. This leads to a lack of credit and low financial savings," it said.
"Total credit, at 50 percent of GDP remains well below that of its Asian neighbors (an average of over 100 percent of GDP) and especially compared with China (111 percent of GDP)," it continued.
"Within this, consumer credit remains abysmally low (at 11 percent of GDP) compared with an Asian average of over 40 percent of GDP. Household savings tend to be in physical assets and gold, and risk diversification channels are not available," it added.
Financial reforms, the report said, is urgently needed for India to "meet its growth potential" and the nation should implement policies that "channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability."
Goldman Sachs has also urged the Indian government to increase its global trade, especially with its neighbors. India currently accounts for no more than 1.5 percent of global trade and ranks below the average of all developing countries, the report noted.
For instance, though India's trade with the US and China have grown over the years (trade with the US stood at $42 billion in 2007 while with China, trade stood at $37 billion), yet, it is insignificant when compared with China's trade with the US ($405 billon in 2007).
India must think "increasingly 'global,'" in order to avail of the "benefits of trade with other emerging giants," the report said.
"India continues to be much less 'open' than many of its other large emerging nation colleagues, especially Chinawe would recommend that India target a major increase in trade with China, Pakistan and Bangladesh," it said.
Noting that nearly 1/3rd of the population are on the edge of poverty, the report said that increasing agricultural output could help millions of people shrug off poverty and help generate employment. Though 60 percent of India's labor force is employed in agriculture, the total contribution of agriculture to overall economic growth is less than 1 percent.
"India's agricultural yields are a fraction of those of its more dynamic Asian neighbors. For instance, rice yields are a third of China's and half of Vietnam's," the report said.
However, at a time when global food prices are rising, India should increase its agricultural productivity and take advantage of the situation.
According to the report, India should also improve its infrastructure, including airports, roadways, energy and ports. Poor infrastructure, the report said, hinders economic growth, as valuable work hours are lost.
"Indian companies on average lose 30 days in obtaining an electricity connection, 15 days in clearing exports through customs, and lose 7 percent of the value of their sales due to power outages," it said, adding India should develop its infrastructure to keep in step with "economic growth and urbanization."
And, last but not the least, "environmental sustainability" is critical for India's economic progress due to the nation's "high population density, extreme climate and economic dependence on its natural resource."
"Urbanization, industrialization and ongoing global climate change will take a heavy toll on India's environment, if not managed better," the report said.
Goldman Sachs' report is part of the investment bank's latest annual update to its Growth Environment Scores (GES), which shows that India has scored below the other three BRIC nations, Brazil, Russia and China, and is currently ranked 110 out of a set of 181 countries assigned GES.
According to the investment bank, if India works harder on the necessary reforms and implements the changes, it could raise its economic growth potential annually by as much as 2.8 percent and reach double digit economic growth, which China has been able to record.
GES, introduced by the investment bank in December 2005, aims to summarize the overall structural conditions and policy settings for countries globally. To arrive at a score on a scale of 10, Goldman Sachs looks at 13 variables including inflation, government deficit, external debt, investment rates, openness of the economy, penetration of personal computers, phones, internet, education, life expectancy, political stability, rule of law and corruption.
For the year 2007, Goldman Sachs has placed India's GEC at around 4.5, while China and Russia's were around 5.5, and Brazil's just over 5.
