India is likely to become the fastest-growing emerging market this year and its potential growth could rise to 8 per cent over the next five years driven by Technology, gains in Education and Ease of doing business due to less red tape, Goldman Sachs said today.
Terming these three factors as TEE's, the global brokerage firm said that these could be the key drivers of growth and can contribute 3.6 percentage point to GDP growth annually.
"We forecast India's potential growth could rise to 8 per cent over the period FY16-20 from 7 per cent in FY12-15, under the new GDP series, based on bottom-up factors and structural reforms," it said.
Moreover, in a faster reform scenario, India's potential growth could rise to 9 per cent over this period due to reforms in labour, infrastructure and education, it said.
"With the government focusing its efforts on improving the business climate, we think that micro conditions could see an improvement in contribution to GDP growth over the period," Goldman Sachs Chief India Economist Tushar Poddar said in the research note.
The areas in ease of doing business where the brokerage expects some improvement are "dealing with construction permits", "getting electricity", and "registering property" due to a big push by the government to move these permits online, as well as "resolving insolvency" due to a new bankruptcy code, expected in FY16, Poddar added.
The report further noted that it has taken more time in India for each factor of productivity to affect the economy, while in China, every variable has had a faster impact.
Urbanisation has contributed to growth twice as fast in China compared to India, and in agricultural productivity it was three times as fast.
Goldman Sachs said that by 2020, India's economy could gain over 300 million more internet users and 50 million more high-school graduates. It is already adding 200 thousand bank accounts every day, and nearly 800 government services have moved online, reducing red tape.
"These changes can allow the economy to leapfrog a generation of creating physical infrastructure in retail, banking, and government services, and lead to a jump in productivity," the report said.
The report however cautioned that "there are several caveats to our forecasts for potential growth. First, the baseline forecasts are predicated on a set of reforms playing out, as discussed above. Clearly, if they were not to play out, then the growth potential would be reduced."
India will likely add more people to its labour force over the next decade than any other country, it said.
"Over the next few years, large-scale capex in manufacturing may be constrained due to weak global demand, as well as local impediments. We think it is more likely that services will drive economic growth and jobs, and this can play to India's strengths," Poddar said.
