India today is one of the world's twelve biggest economies.
With a GDP growth rate averaging 7.9 percent 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 "license 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 ten years,
India has emerged as the world's No.1 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 percent of GDP. Since then, it has increased
steadily and rapidly and now stands at almost 40 percent 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 ten 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 percent of GDP on infrastructure whereas
India spent only 4 percent. During the current 5-year plan (2007-2012), India
has been spending about 7.5 percent of GDP on infrastructure. The plans for 2012-2017
are even more aggressive, with the goal of investing $1 trillion on
infrastructure i.e., at a rate of over 9 percent 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 onward 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 slowdown 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 percent 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 4 percent to about 10
percent, 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
percent. 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 2 percent
from China's historical growth rate of about 10 percent. 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
percent. 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 labor
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 ([email protected]) 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).
