Many Indians firmly believe that their future is decided by the constellation of stars at the time of their birth. The moment a child is born, parents and grandparents rush to an astrologer to get the newborn baby’s horoscope made, and then spend their lives to fit into the foretold pattern. So what is the future foretold for India, which is no longer a newborn country but could be termed a youth in the recent history of nation states?
I was reminded of this in a recent discussion on the Indian economy with the chairman of a large US-based MNC who was visiting India. We discussed how India seemed to have come out of the economic crisis stronger than most nations, perhaps by a combination of luck (we had the right stars in our corner!) and design. But, more important was the simple question he posed to me: Was India’s remarkable growth story of this decade “capped out” or was it the beginning of the next wave of growth, a destiny perhaps foretold by the stars?
To set the context for this interesting question, let us first take a short historical tour of India’s GDP growth in the last 45 years. In the first decade of this period (1965-74), the average GDP growth was 3.1 per cent. The next 30 years saw the average GDP growth increase in each decade (1975-84, 1985-94, 1995-04) to 4.9 per cent, 5.5 per cent and 6.1 per cent, respectively. The first five years of the current decade (2005-14) saw the GDP growth increase further to 7.9 per cent despite one of the worst economic crises of our lifetime. India has emerged from the crisis remarkably unscathed and much stronger than many other countries, and this was reflected in the optimism of our finance minister’s recent Budget speech where he did mention the magic figure of 10 per cent-plus GDP growth. Of course, he did leave the timeline somewhat undefined as “within the next few years”.
We all know that many of the drivers of our economic growth are in place. The 11th Five Year Plan calls for more than doubling investments in infrastructure to over Rs 20,00, 000 crore as compared to the 10th Five Year Plan. The government proactively talks about the need to reduce transaction costs through policies like goods and services tax (GST), and achieve financial consolidation through implementation of the Finance Commission recommendations. Equally well-known is the fact that foreign direct investment (FDI) into India has been growing rapidly and we have seen the second wave of big overseas investments in the last three years. On this score, it is interesting to note that for the first time in 2008, FDI from Japan into India exceeded that into China.
Let me point out two interesting elements of our economy’s journey in next five years. We know that among many differences between Indian and China’s economy, a key difference is the fact that the Indian economy is much more consumption-driven while China’s is an investment-led economy. This difference will play a big role as we should see a big impact on the Indian economy because of dramatic growth in consumption in many products — this is called “hockey stick” growth — due to a historic combination of changing dependency ratio and growth in middle class. Dependency ratio, which gives the ratio of typical dependents in a society (age below 19 years and over 60 years) to working-age population (20 to 59 years), will see a historic shift in India from 1.04 to 0.76 in the next five years, with the largest part of our population entering the working age of 20 years. Combine this with growth of 15 per cent in the number of middle-class households in India in the same five-year period and a “consumption hot-spot” is created.
The other interesting element is the role of the manufacturing sector. Few years ago, I remember pointing out proudly to overseas visitors the fact that over 50 per cent of India’s GDP was contributed by the services sector, an economic structure similar to that of more developed economies. The unspoken implication was that India had perhaps jumped the traditional stage of economic development and was well on its way to a more mature economic structure. We now realise that view was erroneous. I was pleasantly surprised by the statement made by the finance minister in his Budget speech this year that manufacturing sector is the growth driver for the Indian economy. Clearly, there seems to be a significant change in the thinking of the government on the role of the manufacturing sector and its contribution to our economic development. This sector has to play the critical role in creating significant share of the 220 million new jobs that India needs in the next 15 years, which will be crucial to our economic growth.
So, what has this economic discourse got to do with astrology and stars, and with the question posed by the MNC CEO on the GDP growth? I am not an astrologer, though at the prodding of my wife I must admit I have been to see some of them and, to just please my wife, tend to agree with her when she says confidently that some event in our lives was predestined. Despite the natural instinct of a rationalist, let me don the hat of an “economic astrologer” and say that whatever we do (or don’t do), India’s stars are so arranged in their constellation that we are destined to achieve an average GDP growth rate of over 10 per cent in the next five years!
Let me explain why. In recent years, the only country that has delivered a consistent 10 per cent-plus GDP growth rate is China. So, to answer the question about what will take India to 10-per cent GDP growth, I looked at China for some pointers. If you look at its performance in the last 10 years, it had been growing at about 7-8 per cent till about 2002 when it switched gears to a growth trajectory of 10 per cent-plus GDP (the highest was 13 per cent in 2007). I looked at its economic characteristics in 2002-03 when this change happened and compared these with India in 2010 to draw any parallels. I was quite astonished to see the parallels — India today is exactly where China was six-seven years ago when it moved to the 10 per cent growth trajectory. Let me share four key data points to illustrate this.
- China’s average income level in purchasing power parity (PPP) terms in 2002 was close to $3,000 — this is same as India’s per capita income in PPP terms today.
- China’s FDI in 2002 of around $39 billion is very close to India’s FDI levels today. India’s investment as a percentage of GDP, which used to be around 23-24 per cent for many years, has grown to about 38-39 per cent in 2009. Guess what China’s investment was as a percentage of GDP in 2002? It was 38 per cent!
- The final parallel is on exports. China’s exports, which have been one of the key drivers of its GDP growth, are around 36 per cent of its GDP today. When it took off in 2001, it was just 23 per cent. Guess what India’s exports were in 2009? They were 23 per cent of its GDP!
Sceptics will claim that these are just numbers, and coincidences occur in only reel life, not in real life. The believers will see this as signs from heaven that India’s future destiny is written in the stars, and despite all the challenges we face (and I am sure China faced its own set of challenges in 2002), we are on our way to the 10 per cent growth trajectory. So, are we going to fulfil our destiny or let the challenges steal our future away?
You decide.
The author is managing director,The Boston Consulting Group, India