Foreign Policy Blogs

Bounding Tiger

indian-tigerA number of my recent posts (read here and here) have raised serious questions about India’s long-term economic prospects.  But two new reports – by Morgan Stanley and the Asian Development Bank (ADB) – offer more optimistic, albeit caveat-filled, appraisals.

The Morgan Stanley report projects that over the next few years Indian economic growth will accelerate markedly while China’s will begin to moderate, with the result that by 2013-15 India will overtake its northern neighbor as Asia’s high-flying economy.  Indeed, the report argues that over the next 20-25 years India will be the highest-growth economy among large nations.  Moreover, the size of the Indian economy by 2020 will be over $6 trillion, compared to $1.2 trillion in 2009.  And India is expected to reach China’s 2009 per-capita income level of $3,750 over the next decade or so.

A number of key factors are driving this expansion though foremost among them is prodigious demographic growth.  India will add an astounding 136 million people to its labor force over the next decade, with the country accounting for over a quarter of the overall increase in the global workforce in this period.  In stark contrast, China will add just 23 million new workers in the coming decade.  (For a new Goldman Sachs report on the link between India’s population growth and economic fortunes, read here.) 

Besides the sheer size of the population, the Morgan Stanley report argues that India’s reservoir of human capital is significantly increasing.  With primary-school enrollment rates rising significantly over the past few years, new entrants to the workforce are much better educated than their parents.  The report predicts that within the next 2-3 years, only 5 percent of new workers will be illiterate, and that by the end of this decade India will be churning out the world’s largest annual supply of tertiary graduates – that is, holders of college or vocational degrees.

Equally important, the country’s youthful bulge means the working-age population is growing faster than the non-working (children and the elderly) population.  As a result, by 2020 the median age in India will be 28.1 years, compared to 37.1 in China.  Indeed, for the next few decades, India will be the only large country with a favorable demographic profile. Japan, Western Europe, Russia, the United States and China all will face significant increases in their aging populations. 

India’s combination of rising worker income and dependents consuming relatively fewer resources means that people will be able to save a larger proportion of their incomes, contributing in turn to a larger pool of national savings that can be directed to productivity-enhancing investment (such as infrastructure development).  Over the past decade, savings to GDP has risen from 24-25 percent to 33-36 percent, while the investment to GDP ratio has witnessed a similar increase.  The report expects that the aggregate savings rate will rise to the 37-40 percent level in the coming decade.  (For a related Goldman Sachs study that similarly concludes that demographic growth will boost national net savings over time, read here.)

The report argues that economic reforms, particularly those deepening India’s integration into the global economy, have also play important roles in lifting the country’s growth trajectory.  India’s share of global services exports grew from 1.1 percent in 2000 to 2.6 percent in 2009.  Gross foreign direct investment (FDI) increased from 0.9 percent of GDP in 2005 to 2.8 percent in 2009 – an amazingly development given the retrenchment of global capital in the last few years.  Indeed, FDI inflows as a share of GDP are higher in India than in China and Brazil.

The Morgan Stanley report concludes by warning that India’s high-growth prospects are dependent on overcoming a number of internal challenges.  The country’s labor laws require fundamental overhaul, since they “are not in sync with the practical realities of a highly competitive globalized world.”  Continued reduction of high government debt loads – at both the central and state level – is necessary in order to avoid crowding out private-sector investment.  New Delhi will also need to increase infrastructure spending from the current 7.5 percent of GDP to 10 percent, as well as accelerate educational reforms, particularly at the secondary and tertiary levels. 

The ADB report focuses on the explosive rise of the middle class throughout developing Asia (that is, excluding the developed economies of Japan and South Korea).  It argues that Asia will account for 55 percent of the global middle class by 2030, up from the current 25 percent.  Much of this increase will be driven by the expansion of the middle class in China and India.   (The report defines the middle class as having daily consumption expenditures of $2-$20 per person as measured in 2005 U.S. dollars on a purchasing power parity basis.)

In absolute terms, India has the second largest middle class in Asia, following China.  Based on Indian government data, the middle class numbered about 274 million people in 2005.  The ADB expects this number to grow to over 600 million by 2020, and to over 1 billion by 2030 – at which point, the middle class in India will outnumber that in China.  But when measured by share of national population, the Indian middle class is among Asia’s smallest, comprising only a quarter of the total population.  Compare this, however, to the 63-percent share in China, 55 in the Philippines, 53 in Vietnam, 40 in Pakistan and 33 in Cambodia.

Moreover, over 80 percent of the middle class in India falls in the $2-$4 daily consumption bracket and thus is vulnerable to slipping back into poverty in the event of a major economic shock.  Nor is the Indian middle class particularly well educated: 48 percent have not completed high school; 19 percent possess a high school degree but have not attended college; 14 percent have some tertiary-level education; and only 18 percent hold a college degree.

On the upside, the report argues that the emergence of a growing middle class throughout Asia has created new avenues of entrepreneurship and innovation (perhaps best exemplified in India by the Nano and the jugaad philosophy) and a more prominent voice for improved delivery of public services.  On the downsize, the middle class expansion is bringing a number of unintended consequences, including environmental stresses and a transition to unhealthy, high-fat diets that has resulted in a rise in obesity levels and an increase in chronic, non-communicable diseases (such as diabetes, cardiovascular ailments and cancer). 

Whether India will be able to fulfill the huge potential sketched out in the Morgan Stanley and ADB reports remains an open question, however.  As the Economic Times editorialized, Morgan Stanley assumes that the quality of governance will improve, not deteriorate, “but signs of the political will that is needed to improve governance are despairingly scanty.”  Arvind Subramanian’s op-ed in the Financial Times last week is similarly pessimistic, arguing that India’s fraying state institutions and lackluster policy reforms make Chinese-type growth rates elusive.

 

Author

David J. Karl

David J. Karl is president of the Asia Strategy Initiative, an analysis and advisory firm that has a particular focus on South Asia. He serves on the board of counselors of Young Professionals in Foreign Policy and previously on the Executive Committee of the Southern California chapter of TiE (formerly The Indus Entrepreneurs), the world's largest not-for-profit organization dedicated to promoting entrepreneurship.

David previously served as director of studies at the Pacific Council on International Policy, in charge of the Council’s think tank focused on foreign policy issues of special resonance to the U.S West Coast, and was project director of the Bi-national Task Force on Enhancing India-U.S. Cooperation in the Global Innovation Economy that was jointly organized by the Pacific Council and the Federation of Indian Chambers & Industry. He received his doctorate in international relations at the University of Southern California, writing his dissertation on the India-Pakistan strategic rivalry, and took his masters degree in international relations from the Johns Hopkins University School of Advanced International Studies.