Boom with a View
World Of Finance by Vijaya Sai.M |
As we step into a new decade, the growth drivers for the economy are diverse and robust, but so are the challenges ahead.
India is today poised to enter a phase of exponential growth and development. From an unlikely global player stagnating at a low rate of growth in the 1980s, to a nation of great potential, India’s economic transformation has been remarkable. Given this transformation, and the strength of the fundamentals supporting it, the next decade promises to be exciting for the Indian economy.
To understand what is possible, I always look at proxies from the world around us. The best and most recent example is that of China. China grew at a CAGR (compounded annual growth rate) of 9.5% for over 25 years since it began its economic reform process in 1979. The impact of such high growth was phenomenal. China’s GDP grew tenfold over this period. According to China’s official statistics, the poverty rate fell from 53% in 1981 to 2.5% in 2005. The wealth creation and infrastructure development in China is there for all to see.
Over the next decade, we can expect to see similar trends in the Indian economy. Currently, we are at the beginning of a similar high growth phase and all factors indicate that such a trajectory is sustainable.
To understand what is possible, I always look at proxies from the world around us. The best and most recent example is that of China. China grew at a CAGR (compounded annual growth rate) of 9.5% for over 25 years since it began its economic reform process in 1979. The impact of such high growth was phenomenal. China’s GDP grew tenfold over this period. According to China’s official statistics, the poverty rate fell from 53% in 1981 to 2.5% in 2005. The wealth creation and infrastructure development in China is there for all to see.
Over the next decade, we can expect to see similar trends in the Indian economy. Currently, we are at the beginning of a similar high growth phase and all factors indicate that such a trajectory is sustainable.
Growth Drivers
To understand what will drive growth, going forward, one needs to look at the evolution of the Indian economy over the past decade and identify the structural factors that drove our recent 9% growth levels. It is important to understand that, while the reforms process laid the foundation of a competitive economy, our growth drivers were based not only on policy action but, to a large extent, on strong fundamentals. As we look ahead at the next decade, let us analyse how some of these fundamentals will shape up.
Demography and Workforce: Demography has been one of the most important drivers of growth in India. With a population of this size, India is home to the world’s largest middle class. In addition, the availability of a low-cost and yet highly-skilled workforce has made India the most attractive off-shoring destination.
By 2020, the demographic advantage of India will become even more significant. This will have the following positive consequences: firstly, a large working population coupled with a low dependency ratio that would mean a higher savings rate; secondly, higher consumption and spending patterns of a young population will drive domestic demand. The low level of dependency will impact the savings rate positively with very little ‘dis-saving’ in the economy. This would, in turn, lead to a growth in future capital formation.
Infrastructure Development: We have already seen that economic growth and rising incomes result in increased demand for infrastructure development. Over the next decade, this phenomenon is going to accelerate in the Indian context. The experience of South-East Asian economies highlights that rapid and large-scale infrastructure improvement becomes a reality once the growth process is firmly established, owing to greater demand and availability of financing. The recent emphasis on infrastructure development in India is also indicative of the fact that we will be seeing significant activity in this space, going forward. Over the next decade, infrastructure investments and the trickle-down effects of infrastructure spending and development will emerge as another pillar of growth for our economy.
Services: The services sector has been the highlight of growth for the Indian economy in the past decade. Rapid advances in technology have led to the dissolution of geographical boundaries and reduced entry barriers for knowledge-based businesses. India has been able to convert this global phenomenon into a growth opportunity by sublimating its knowledge capital into wealth creation. Over the next decade, it is expected that the services sector will continue its growth across the value chain from back-end volume-centric jobs to specialised work.
Industry: Over the past decade, doubts about the ability of the Indian manufacturing sector to survive in an era of global competition have been laid to rest, with greater operational re-engineering and a strong focus on quality and efficiency. Indian corporates have not only competed successfully with foreign firms in domestic markets, but have also expanded overseas through organic and inorganic channels. Again, this is only the beginning of the curve.
By 2020, Indian industries will assume global prominence. The outsourcing phenomenon will spill over to the industrial sector where India will emerge as a hub for specialised manufacturing goods like automobiles, pharmaceuticals, biotechnology and telecommunications. Over the next 10 years, most of these industries are projected to grow at impressive rates. The growth of the industrial sector will be based on technology and research & development platforms, and the ability to innovate to drive down costs. Indian industry will see growing demand from the Indian consumer as well as growing market share outside India
To understand what will drive growth, going forward, one needs to look at the evolution of the Indian economy over the past decade and identify the structural factors that drove our recent 9% growth levels. It is important to understand that, while the reforms process laid the foundation of a competitive economy, our growth drivers were based not only on policy action but, to a large extent, on strong fundamentals. As we look ahead at the next decade, let us analyse how some of these fundamentals will shape up.
Demography and Workforce: Demography has been one of the most important drivers of growth in India. With a population of this size, India is home to the world’s largest middle class. In addition, the availability of a low-cost and yet highly-skilled workforce has made India the most attractive off-shoring destination.
By 2020, the demographic advantage of India will become even more significant. This will have the following positive consequences: firstly, a large working population coupled with a low dependency ratio that would mean a higher savings rate; secondly, higher consumption and spending patterns of a young population will drive domestic demand. The low level of dependency will impact the savings rate positively with very little ‘dis-saving’ in the economy. This would, in turn, lead to a growth in future capital formation.
Infrastructure Development: We have already seen that economic growth and rising incomes result in increased demand for infrastructure development. Over the next decade, this phenomenon is going to accelerate in the Indian context. The experience of South-East Asian economies highlights that rapid and large-scale infrastructure improvement becomes a reality once the growth process is firmly established, owing to greater demand and availability of financing. The recent emphasis on infrastructure development in India is also indicative of the fact that we will be seeing significant activity in this space, going forward. Over the next decade, infrastructure investments and the trickle-down effects of infrastructure spending and development will emerge as another pillar of growth for our economy.
Services: The services sector has been the highlight of growth for the Indian economy in the past decade. Rapid advances in technology have led to the dissolution of geographical boundaries and reduced entry barriers for knowledge-based businesses. India has been able to convert this global phenomenon into a growth opportunity by sublimating its knowledge capital into wealth creation. Over the next decade, it is expected that the services sector will continue its growth across the value chain from back-end volume-centric jobs to specialised work.
Industry: Over the past decade, doubts about the ability of the Indian manufacturing sector to survive in an era of global competition have been laid to rest, with greater operational re-engineering and a strong focus on quality and efficiency. Indian corporates have not only competed successfully with foreign firms in domestic markets, but have also expanded overseas through organic and inorganic channels. Again, this is only the beginning of the curve.
By 2020, Indian industries will assume global prominence. The outsourcing phenomenon will spill over to the industrial sector where India will emerge as a hub for specialised manufacturing goods like automobiles, pharmaceuticals, biotechnology and telecommunications. Over the next 10 years, most of these industries are projected to grow at impressive rates. The growth of the industrial sector will be based on technology and research & development platforms, and the ability to innovate to drive down costs. Indian industry will see growing demand from the Indian consumer as well as growing market share outside India
Rural Economy: The strength of our rural economy came to the fore during the recent global financial crisis. It was widely accepted that demand from rural India supported the overall economy during this period. This reiterates the fact that rural India is gradually becoming an important growth driver. Despite this, the rural economy still remains a vast untapped market.
The next decade will see greater integration of the rural economy into the economic mainstream with holistic development of agricultural and non-agricultural sectors. There will be a shift in focus from the quantum of output to the integration of productivity enhancements with greater emphasis on the compatibility of the composition of agricultural production with domestic and international demand.
Support infrastructure in the form of irrigation projects, rural electrification, incorporation of developments in biotechnology and promotion of crop diversity along with the creation of proper marketing infrastructure will be the defining characteristics of the agricultural sector. This will boost rural household incomes and have a multiplier effect on the demand for goods and services across the economy. We are already seeing the positive impact of improved road and telecommunications connectivity in enhancing productivity and opening up new opportunities in the rural economy. Rural growth will be supported by the expansion of the private sector which will significantly increase its presence in the rural economy, driven largely by the market opportunities in this segment.
The next decade will see greater integration of the rural economy into the economic mainstream with holistic development of agricultural and non-agricultural sectors. There will be a shift in focus from the quantum of output to the integration of productivity enhancements with greater emphasis on the compatibility of the composition of agricultural production with domestic and international demand.
Support infrastructure in the form of irrigation projects, rural electrification, incorporation of developments in biotechnology and promotion of crop diversity along with the creation of proper marketing infrastructure will be the defining characteristics of the agricultural sector. This will boost rural household incomes and have a multiplier effect on the demand for goods and services across the economy. We are already seeing the positive impact of improved road and telecommunications connectivity in enhancing productivity and opening up new opportunities in the rural economy. Rural growth will be supported by the expansion of the private sector which will significantly increase its presence in the rural economy, driven largely by the market opportunities in this segment.
Addressing the Challenges
As is evident, the growth drivers for the economy are diverse and robust and provide the potential to transform India and create widespread prosperity in our country. The key challenges in achieving this potential would be addressing income inequality, understanding the impact of changing lifestyles and urbanisation, achieving technological advances that will change price-performance relationships, ensuring that the ecological impact of development is sustainable and, finally, strengthening governance and the rule of law.
On the social front, there will be the need to build education and health-care infrastructure, especially in rural India, to support widespread and inclusive growth. However, it is important to remember that the rural social infrastructure in India is better than that in many developing countries. In these areas as well, private entrepreneurship is coming to the fore, driven by demand for better-quality services and the ability to pay for them that comes with rising household incomes. The investment by private entrepreneurs in these areas, in turn, gives a boost to the rural economy. Simultaneously, as incomes and aspirations rise, they will catalyse improvement in delivery of government schemes. The past decade witnessed the rapid extension of healthcare and education in Tier-1 and Tier-2 cities and, over the next decade, economic growth will drive the same momentum across rural India.
The next decade promises to be one where India firmly establishes itself as a major economic player in the global context. Our resilience in the face of the recent global financial crisis has highlighted the fact that we have developed the ability and flexibility to quickly respond to any systemic shocks. Over the next decade, we need to ensure a facilitating environment for such self-sustaining and deep-rooted growth. India, in 2020, is definitely an exciting proposition. Let us all think big and work towards converting it into reality.
As is evident, the growth drivers for the economy are diverse and robust and provide the potential to transform India and create widespread prosperity in our country. The key challenges in achieving this potential would be addressing income inequality, understanding the impact of changing lifestyles and urbanisation, achieving technological advances that will change price-performance relationships, ensuring that the ecological impact of development is sustainable and, finally, strengthening governance and the rule of law.
On the social front, there will be the need to build education and health-care infrastructure, especially in rural India, to support widespread and inclusive growth. However, it is important to remember that the rural social infrastructure in India is better than that in many developing countries. In these areas as well, private entrepreneurship is coming to the fore, driven by demand for better-quality services and the ability to pay for them that comes with rising household incomes. The investment by private entrepreneurs in these areas, in turn, gives a boost to the rural economy. Simultaneously, as incomes and aspirations rise, they will catalyse improvement in delivery of government schemes. The past decade witnessed the rapid extension of healthcare and education in Tier-1 and Tier-2 cities and, over the next decade, economic growth will drive the same momentum across rural India.
The next decade promises to be one where India firmly establishes itself as a major economic player in the global context. Our resilience in the face of the recent global financial crisis has highlighted the fact that we have developed the ability and flexibility to quickly respond to any systemic shocks. Over the next decade, we need to ensure a facilitating environment for such self-sustaining and deep-rooted growth. India, in 2020, is definitely an exciting proposition. Let us all think big and work towards converting it into reality.
KV Kamath is a former CEO of ICICI Bank and is currently the Bank’s non-executive chairman
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