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India to start matching China’s growth in the next
two years: We believe that, over the next two years,
India will start matching China’s GDP growth of around
8.5-9.5%, barring another global financial crisis.
By 2013-15, India should outpace China: More
importantly, we think that by 2013-15 India will begin to
outpace China’s GDP growth notably. We believe
China’s growth will move towards a more sustainable
rate of 8% by 2015, following the remarkable 10%
average of the past 30 years. We think India’s growth
will accelerate to a sustainable 9-10% by 2013-15, after
an average of 7.3% over the past 10 years.
What will drive this strong growth? The combined
effect of demographics, structural reforms and
globalization will help create a virtuous cycle of
productive job creation, income growth, savings,
investments, and higher GDP growth.
Macro impact on the rest of the world – similar to
that of China over the past 10 years: We expect
India’s per capita income to reach China’s 2009 level of
US$3,750 over the next 10-11 years. We think India will
see a further rise in its ratio of investment to GDP,
particularly infrastructure, while China will see a gradual
rise in consumption GDP.
In our second report comparing India and China in 2006 (India
and China: New Tigers of Asia, Part II dated May 29, 2006),
we made a call that India had the potential to catch up with
China in terms of GDP growth rates. That time has come, in
our view. We believe that, over the next two years, India
should start matching China’s GDP growth of around 8.5-
9.5%, barring another global financial crisis. More importantly,
we think that, by 2013-15, India will start outpacing China’s
GDP growth notably. Morgan Stanley’s Chief Economist for
China, Qing Wang, thinks China’s growth will move towards a
more sustainable rate of 8% by 2015, following the
remarkable 10% average over the past 30 years. We believe
India’s growth will accelerate to a sustainable 9-10% by 2013-
15, after an average of 7.3% over the past 10 years. In other
words, over the next 10 years, we expect India’s growth to
outpace China’s. Indeed, we expect India’s per-capita income
to reach China’s 2009 level of US$3,750 over the next 10-11
years. We believe India will see a further rise in investments
to GDP, particularly infrastructure, and that China will see a
gradual rise in consumption GDP.
India to start outpacing China from 2013-15
We believe that, by 2012, India and China will likely achieve
similar growth rates of closer to 9% and from 2013-15 India
will start outpacing China’s GDP growth notably. We believe
this shift will be premised on three key factors:
1) The improvement in demographics as measured by
declining age-dependency (the ratio of the dependent
population size to the working-age population size) will be the
most important factor supporting this acceleration in growth.
The demographic trend is likely to diverge in the two
countries. China is expected to reach an inflexion point in its
age-dependency ratio around 2015. The United Nations (UN)
estimates China’s age-dependency ratio will rise from 39.1%
in 2010 to 40% in 2015 and 45.8% in 2025, whereas India’s
will continue to improve from 55.6% in 2010 to 51.7% in 2015
and 47.2% in 2025. This would be reflected in the median age
in China, which by 2020 would reach 37.1 compared with 28.1
for India. The economic impact of India’s demographic trends
should improve further as age dependency declines.
2) A steady implementation of structural reforms is
important to create the employment platform for a rising
supply of educated/skilled labor. Further reforms that help
create a platform of productive employment for the rising
working-age population in India will be needed, in our view.
India’s voting population demographics are changing rapidly,
with a rising bias towards younger people, who are literate
and hungry for development. Indeed, one positive outcome of
having a larger share of seats in parliament for the singlelargest
party in general elections held in May 2009 is that the
Congress Party-led coalition government has been able to
initiate some difficult reforms. Over the past 12 months, the
government has systematically focused on reducing the
subsidy burden on oil and gas. Also, infrastructure execution
is picking up gradually.
Over the next 12-24 months, we expect the pace of reforms to
pick up, with the government initiating the following: (a) a
further steady reduction in subsidies; (b) the introduction of a
Goods and Services Tax (GST) system; (c) consolidation of
the public sector deficit; (d) meaningful steps towards
divestment of the government’s stakes in SOEs; (e)
acceleration in infrastructure spending, particularly for roads
and power; and (f) FDI in retail marketing and distribution.
3) India will continue to benefit from globalization, which
should help increase job opportunities for the country’s skilled
labor force. We expect India’s exports to GDP to continue
rising. The combined effect of more favorable demographics
and increased productive job opportunities should boost
India’s private savings level. We estimate this could push
aggregate savings to 37-40% of GDP over the next 10 years,
allowing the country to maintain an investment-to-GDP ratio of
39-42%. This increase in savings and, correspondingly, the
investment-to-GDP ratio should ensure a shift in India’s
growth to a sustained rate of 9-10% in this period.
Net capital inflows as a percentage of GDP in India have
increased sustainably to 4-5%, except for during the credit
crisis. Gross FDI in India increased to 2.8% of GDP in 2009
from 0.9% in 2005. Indeed, FDI as a percentage of GDP in
India is now higher than in China and Brazil. Capital inflows
help India fund its current account deficit and allow the
country to accelerate investments more than savings.
Moreover, capital inflows into India tend to be in the nature of
high-risk capital. Indirectly, this large source of risk capital
acts as a catalyst to private corporate capex. The combined
impact of the continued structural reforms, financial
deepening and rising investments will help boost productivity
growth further over the next 10 years.
Qing Wang expects China’s sustainable GDP growth to
moderate to 8% towards 2015. With a changing
demographic trend, China is unlikely to be able to maintain its
increasing supply of cheap labour at the same pace as it has
over the past 20 years. According to UN data, China is
expected to add only 23 million people to its working-age
population over the next 10 years, compared with 118 million
people added over the past 10 years. In contrast, India is
expected to add 136 million over the next 10 years.
In this context, we expect China to initiate a structural change
in its growth model, reducing its dependence on external
demand, increasing consumption to GDP, and narrowing the
current account surplus. This rebalancing would primarily be
premised on lifting wages as a percentage of GDP and the
repricing of economic resources such as materials to reduce
environmental costs. A corollary to this trend, we believe, will
be the transition of the country’s exports model from low
value-added manufacturing to higher-value-added
manufacturing. Similarly, we think China’s share of
consumption to GDP and services to GDP will rise over the
next 10 years.
India to offer best growth opportunity over next 25 years
Over the next 20-25 years, we expect India to remain the
highest growth economy among the large countries. India
could have the advantage of maintaining its high-growth
phase for a longer period than East Asia did, as UN data
shows that India’s age dependency will continue to decline
until 2040. Indeed, UN projections show that India will be the
only large country with favorable demographics after 2010.
Japan, Europe, and the US (in that order) will have a
significant rise in their ageing populations. So, while in the
past 20 years, China has benefited ahead of India from a
faster fall (improvement) in its age-dependency ratio, over the
next 20-25 years India will likely have this advantage.
Internal challenges to sustain strong growth story
We believe there are several challenges to India’s high growth
story. First, the government needs to ensure that it delivers on
the execution of infrastructure development. The trend in
China over the past 25 years indicates that, for 10%
sustainable GDP growth, India would need to increase
infrastructure spending to 10% of GDP from the current 7.5%.
Second, one of the key pillars of our strong outlook for India is
a structural rise in domestic savings and investments. In that
context, a reduction of the government’s revenue deficit would
be critical. Third, labor law reform would need to be
prioritized. We believe labor law reforms would be needed to
support growth in labor-intensive industries. Fourth,
development of less-developed states. Rising income
inequality and high poverty levels in some states have
increased the probability of social instability. Already, a few
states have faced insurgency from Naxalites and the internal
security threat from this movement is a concern. Fifth, we
believe measures to further improve secondary and tertiary
education infrastructure would be required to help sustain the
strong growth story.
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