rev102_economia.jpgBy Rafael Pampillón published in IDEAS, IE Business School alumni magazine

After Vietnam, India is the world economy that will enjoy the highest growth, with a forecasted yearly average growth rate of 8.5%.

Almost everyone agrees that the country in the starring role during the first half of the 21st century is China. But no one has any doubt that the second half of the 21st century will also feature India as a protagonist. The largest populations in the world â?? for some years now both countries have been implementing reforms enabling change of their economic model, from high-intervention to market economies. These reforms have consisted of ambitious economic policy strategies that have meant greater internal deregulation, and opening to the exterior, that have produced high economic growth rates. This growth process has been accompanied by reductions in poverty levels in both China and India, although, unfortunately, social and regional inequality has increased. All this means that the governments of both countries continue to prioritize the adoption of measures for maintaining or even increasing economic growth, to raise the populationâ??s level of per capita income, and to generate a higher level of wellbeing to allow sustainable development.Economic structure
As a consequence of the economic reforms, Indiaâ??s productive structure has undergone notable changes over the last 15 years. Transformations in the production system led the services sector in 2006 to generate 55% of the GDP, industry 27%, and agriculture 18% (see table 1). Services use 27% of the working population, and also represent the sector with the highest growth rate. In the Services sector as a whole, special mention must be made of the information and communications technologies (ICT) sector which is expanding in a sustained manner and growing at a yearly rate of 25%. The success of the ICT sector in India has had a significant impact on the countryâ??s economic productivity. The arrival of the digital age, and the new workforce with a high level of education and the ability to speak English, has gradually transformed the country into an important destination for international companies looking for technological support.

Accordingly, India is characterised as a country that exports software and financial services experts, as well as computer engineers. The growth in value added in 2006 was as high in services as it was in industry and reached 11%. This growth has been possible thanks to the increase in domestic savings, which has come with an acceleration of the internal investment rate, which increased by almost 11 percentage points of the GDP between 2001 and 2006. The rapid improvement in saving levels and the acceleration in the formation of national capitals in recent years constitute more proof of the positive impetus for growth that has come from the structural reforms process.

The direct foreign investment flows have been very important for maintaining investment levels at around 35% of the GDP, to obtain an average yearly growth of around 9%. The Indian government is well aware that in order to continue to attract direct foreign investment, it needs qualified labour, good policies, and good institutions. India has taken second place as the destination most favoured by direct foreign investment, preceded only by China (AT Kearney consultants). The United States is in third place.

Demographic dividend
The population or forecasts of the UNO estimate that, in the year 2025, the Indian population will total 1,395 million (today, the figure stands at higher than 1,100 million). The determining factor behind the growth of the GDP over the coming decades will be the increase in the working-age population. In 2015, the population 15-64 years-old is expected to increase by almost 20%. In addition, it is estimated that this trend will continue and the working-age population will have increased in 2025 by more than 36% in comparison with the 2005 level. Should these forecasts be correct, in 2025, more than 67% of the Indian population will be between 15 and 64 years-of-age.

the growth of the GDP over the coming decades will be the increase in the working-age population. In 2015, the population 15-64 years-old is expected to increase by almost 20%. In addition, it is estimated that this trend will continue and the working-age population will have increased in 2025 by more than 36% in comparison with the 2005 level. Should these forecasts be correct, in 2025, more than 67% of the Indian population will be between 15 and 64 years-of-age.

Challenges
The Indian economy will be put under pressure in 2008 as a consequence of the world economic crisis. Its growth rate of 9% of recent years will suffer from the negative impact of American deceleration. Indeed, the Asian Development Bank has anticipated that the growth of the GDP for the 2007 tax year (which ended in March 2008) will be 8.7%, almost one percentage point down on the figure for the previous year. The country is also facing other challenges, such as pressure from inflation, which may lead the Indian monetary authorities to increase interest rates. This would increase capital cost and have a negative effect on trade and credit for business all over the country. In short, India remains vulnerable to economic cycles. Consequently, some analysts suggest that the GDP may grow by only 7% in 2009. And that would be a problem, since the Indian economy must grow at 9% or 10% for a few years to reduce its poverty levels.

The boost provided by the reforms that were implemented in 1991 is probably coming to an end and it will be necessary to implement a new economic policy that adds flexibility to the labour market and improves the countryâ??s struggling infraestructures. The potential is there; it simply has to be exploited with the appropriate economic policies. (Table 2 includes the forecasts for growth for the main emerging economies for the period 2007-2050.) After Vietnam, India is the world economy that will enjoy the highest growth, with a forecasted yearly average growth rate of 8.5%.

Conclusions
Next 15 August, India will celebrate 61 years of independence. The former British colony has the largest population in the world after China, and it is the largest multi-party parliamentary democracy on the planet. It has a potential that could turn it into one of the driving forces behind the world economy in the 21st century. This is due to the fact that it has the most powerful middle class in the world; it leads the way in the training of computer technicians and engineers; English is spoken everywhere; it specialises in cutting-edge technology sectors; and has experience in fields such as nuclear energy, combat helicopters and aeroplanes, satellites, software and oceanography.

However, a significant part of the population lives in misery. As a result, India has a long way to go in areas such as reducing poverty and the migration of workers from the country to industry or services. Unlike China, the Indian population of around 1,100 million inhabitants is very young. Even so, India only can take advantage of this demographic advantage if it creates sufficient jobs for those who constantly join the workforce; otherwise, the high levels of unemployment could exacerbate social tension.

Despite the importance of its technological sector, as an economy, India is still far from reaching the importance of China, presently the worldâ??s factory. However, India is becoming the worldâ??s great services provider. This is due to the high level of education of part of its population, as well as to the fact that salary costs are very low, which means it can offer very competitive goods and services on international markets. For this reason, India attracts many American and European companies from the services sector, especially software, which subcontract many services to Indian enterprises.

Accordingly, PriceWasterhouseCoopers (see The World in 2050: Beyond the BRICs) forecasts that by 2050 India will be the third-ranked world power, preceded only by China and the U.S. As Table 3 shows, in 2050, India will have become the third-ranked economy in the world, with a size equivalent to 88% of the American economy. Indeed, India is now the fourth-ranked economy in the world, with a GDP of USD 4,217 thousand million in terms of purchasing power parity, according to the World Bank (see World Development Report, 2008). India is preceded only by the U.S., with 13,233, China with 10,153 and Japan with 4,229, and followed by Germany, with 2,623 (see Table 2).

The 21st century will be an Asian century. Thanks to its vast size and formidable exporting power, China is already becoming the economy of Asia and the world. However, China will not stand alone in the world economic order. India has the potential for being there too: India is the China of the future.

TABLE 1
Productive Structure of India in % of the GDP
Agriculture 29.3 26.5 23.4 20.9 20.9 18.8 18.3 18
Industry 26.9 27.8 26.2 26.4 26.1 27.5 27.6 27
Services 43.8 45.7 50.5 52.7 52.9 53.7 54.1 55

Source:
Elaboración propia a partir de datos de key indicator, 2007 (Asian Development Bank).

TABLE 2
Growth (yearly average %) of the GDP for the main emerging countries 2007-2050
Vietnam 9.8 6.0
India 8.5 5.0
China 6.8 4.6
Indonesia 6.7 3.9
Pakistan 6.4 3.5
Malaysia 5.8 3.3
Thailand 5.7 3.5
Brazil 5.2 3.1
Turkey 5.1 3.4
Mexico 4.7 3.2
Russia 4.3 3.2

Source:
The World in 2050: Beyond the BRICs. PriceWaterhouseCoopers (2008)

TABLE 3
Relative size (GDP) of economies in 2007 and 2050 (in terms of purchasing power parity; U.S. = 100)
U.S. 100 100
China 51 129
Japan 28 19
India 22 88
Germany 20 14
Russia 17 17
Brazil 15 26
U.K. 15 14
France 15 14
Italy 13 10
Mexico 10 17
Canada 10 9
Spain 10 9
South Korea 9 8

Source:
The World in 2050: Beyond the BRICs. PriceWaterhouseCoopers

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