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Monday, January 29, 2007



 

 

 

   Indian Economy to Surpass US by 2050

  A recent Goldman Sachs study projected that India, along with China, will surpass the US economy by 2050 as India has moved onto a much faster trajectory fueled by strong and steady manufacturing productivity gains.
 

 

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A recent Goldman Sachs study projected that India, along with China, will surpass the US economy by 2050 as India has moved onto a much faster trajectory fueled by strong and steady manufacturing productivity gains. The investment banker said that China will surpass the US by 2035 and India by 2045.

With trade growing at 25%, the study projects a gross domestic product (GDP) growth rate of 8% Goldman Sachs’s BRIC (Brazil, Russia, India, China) report says that “India’s influence on the world economy will be bigger and quicker than implied in 2003.” At that time, the BRIC report projected a 5.7% GDP growth rate for India. India’s urban growth is also expected to be staggering. Already home to 10 of the 30 fastest-growing cities in the world, the report projected that 140 million rural dwellers would migrate to the cities by 2020 and 700 million will live in cities by 2050.

The report also projected unfortunate side effects of this rapid growth. Firstly, the growth will lead to increasing global competition for resources and bring profound impact on the environment since India’s per capital income will quadruple by 2020 and there will be five times more cars using three times more crude oil. Since India imports 70% of its oil, the rising demand will bring it into direct competition with the US and Europe for access to West Asian oil and natural gas resources. Secondly, the race for energy will also drive India and China to court with diplomatically isolated regimes in Iran and Sudan for access to there large energy reserves. Emboldened with such interactions, Goldman Sachs says that these regimes will become less vulnerable to international pressure on nuclear proliferation and ethnic conflict.

The BRIC report also warns that the projections could fail for many reasons. Firstly, inability of the political class to deal with inequality of rising aspirations born out of this rapid could foment "social tensions” and thereby arrest growth. Secondly, “political pressure to slow down the reform process and increasing protectionism” will affect inflow of investments and greatly increase current account deficit, weaken the currency, increase inflation, and cause the economy to implode. Thirdly, politically inspired shortcuts have “the potential to kill the growth goose."

Bringing out the necessity for economic reform, a JM Morgan Stanley report warned that the Indian economy is “at a critical juncture where they need to reassess their growth models and initiate difficult policy reforms for the current strong growth trend to be sustained.” This report maintained that the growth in 2007 will slowdown due to “past measures in the form of interest rate hikes and restrictions to control credit growth are just beginning to work their way through.” It was referring to a recent Reserve Bank of India (RBI) decision to curtail lending by raising the cash reserve ration (CRR) thus sucking out Rs. 13,500 crore (USD 3.3 billion) off the banking system.

The Morgan Stanley report also warns that “that the risk of a sharp spike up in cost of capital and deceleration in growth will rise significantly” if global financial markets turn risk averse due to international instability. Since India is “exposed to the global cycles through its linkages to financial markets to fund its credit-driven domestic demand” and has “fewer tools available relative to China” the report says that “India is more vulnerable to a growth shock.”

Apart from externally influenced economic risks, lack of internal resources and tools are also affecting Indian competitiveness. A recent study commissioned by the Department of Commerce and executed by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) says that inadequate infrastructure and complicated procedures cost exports by as much as 13.24% in pharmaceuticals, textiles, leather, metals & ores and engineering goods sectors. The high transaction costs for imports impacted manufacturing cost of goods old and affecting global competitiveness.

The BRIC report provides India a view into amazing possibilities that Indian politicians and bureaucrats can not even imagine. Many ministers gloat over the increased foreign direct investment (FDI) of USD 15 billion a year while global FDI is about USD 700 billion. It also shows that if India does dare and believe in itself, the economy has the potential to grow rapidly to accommodate broad based social development alleviating the current problems of poverty, economic inefficiencies, economic and social inequality, and unemployment.

At the same time, the Goldman Sachs report also displays an American viewpoint which seeks to impose a tainted view on nations such as Iran and Sudan. While representative democracy, lack of ethnic strife, and peaceful cohabitation is most important, American viewpoint on these important issues are selectively applied to nations that are inimical to its interests. The US is an important friend and partner for India with which there are many shared views and values. The difference is how the two nations view how these values are to be applied and adopted by others globally.

India needs to be cognizant of this distinction and articulate this position to Washington.

 

 

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