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March 20,
2011
India, Ancient Economic
Behemoth, to Overtake China
By Ron Robins, Founder & Analyst
When Europe was going through its
murderous medieval period, India was an economic
behemoth controlling from one-fourth to one-third of the
world’s wealth. After the death of the Indian Mughal
Emperor Aurangzeb in 1707, India descended into
fractious internal wars. This gave the British with
their East India Company the opportunity to seize and
control vast Indian assets, eventually assuming
supremacy over all India.
In 1700, India’s economic output—its gross domestic
product (GDP)—was almost 9 times that of Britain’s. By
1947, just before Indian independence from Britain, the
tables had turned dramatically with British GDP about
1.2 times that of India, according to data by Angus
Maddison in his study, The World Economy.
Now, the International Monetary Fund (IMF) believes the
Indian economy has grown to be the world’s fourth
largest on a purchasing power parity (PPP) basis, that
is, equalising exchange rates given the purchase of a
set basket of goods. A Citi study reviewed in The Times
of India on February 23 said that based on PPP, India
will have the largest economy in the world by 2050. And
the World Bank suggests that India’s economic growth
rate could surpass that of China this year. The Indian
government is projecting 2011 GDP growth of near 9 per
cent.
Furthermore, the US Census Bureau projects India’s
population becoming the world’s largest and surpassing
China in 2025. And by 2050, the Bureau sees India’s
population at 1.66 billion compared to China’s 1.3
billion.
Population demographics are crucial in another sense. In
Ed Dolan’s, India's Secret Weapon in its Economic Race
With China: Demographics, November 11, 2010, he writes
that, “rich countries with slow population growth
have high dependency ratios because they have many
retirees. Low-income countries with fast population
growth have high dependency ratios because they have
lots of children. In between these two states, countries
go through a Goldilocks period when the working age
population has neither too many children nor too many
parents to support... India is just entering its
Goldilocks period while China, like the United States,
is already leaving.”
While considering demographics, Mckinsey & Co expects
India’s middle class population to grow from 50 million
in 2007 to 583 million by 2025, while over 291 million
will move away from desperate poverty to a more
sustainable livelihood. Mckinsey also sees India’s
consumer market becoming the world’s fifth largest by
2025, up from twelfth place in 2007.
Such consumption growth implies enormous economic
investment. And in fact, in the next three years, a
massive $500 billion is being spent on Indian
infrastructure says Chris Devonshire-Ellis in his post,
China Demographics Dictate India as Global Manufacturing
Hub, last September 27. Citing data from Asian
Comparator, he says that Indian wage rates and
associated costs are highly favourable when compared to
China and other Asian nations.
However, for now it is India’s service sector that is
its real star. Relative to China, and given its state of
development, India’s service sector is much larger too
and is thus offering a different growth path to that of
China. In fact, Ejaz Ghani, Economic Advisor at the
World Bank, says in The Service Revolution, March 23,
2010, that the growth in services has India and other
South Asian countries exhibiting the growth patterns of
middle to high income countries.
Mr Ghani also says, “productivity growth in India’s
service sector matches productivity growth in China’s
manufacturing sector… that the effect of services growth
on aggregate economic growth appears to be as strong, if
not stronger, than the effect of manufacturing growth on
overall growth… India’s growth experience suggests that
a global service revolution—rapid growth and poverty
reduction led by services—is now possible.”
Incidentally, services represent about 70 per cent of
global GDP, whereas manufacturing is much lower at 17
per cent. Thus services represent potentially, a much
higher order of growth for India than does
manufacturing.
And services continue to grow rapidly. In a February 21
article in India’s Express Computer, it says that IT-BPO
(information technology-business process outsourcing) is
estimated to be up 19 per cent this year with revenues
of $76 billion. Exports are expected to be $59 billion
of that. For fiscal year 2012 the publication says that
software and services growth is expected to increase 16
to 18 per cent.
India may have yet another advantage over China: it
might be more attractive to foreign executives says Mr
Devonshire-Ellis. He quizzed a number of western
executives who had worked in China and India and asked
them where they prefer to work. He said that, “the
surprising conclusion was that India was preferable.
Several executives expressed a desire never to return to
China.”
Also, the world’s business language, English, is used by
350 million Indians, while about 100 million speak and
write the language fluently. Moreover, unlike China,
much of India’s legal, political, financial and
commercial framework is more familiar to developed
countries’ businesses that would like to do business
with or invest in India.
India has traditionally been a land of great
entrepreneurial activity and wealth. The past three
centuries of poverty have been an anomaly. Now its
economic growth could soon surpass that of China and its
economy become the biggest in the world by 2050. Its
population is projected to be the largest of any country
by 2025. As it grows to have the world’s biggest pool of
working age individuals, its forthcoming massive
investments in infrastructure, its comparative wage cost
advantages, widespread use of English and globally
compatible financial and legal structures, India could
soon become a major world centre for both manufacturing
and services.
India is rising again to become a global economic
behemoth.
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