WILL INDIA BECOME AN ECONOMIC SUPERPOWER, DOES IT MATTER & WHAT MIGHT PREVENT IT? Stephen Howes, Lead Economist (India), World Bank March 2005 [email protected].

WILL INDIA BECOME AN ECONOMIC SUPERPOWER, DOES IT MATTER & WHAT

MIGHT PREVENT IT?Stephen Howes, Lead Economist (India), World Bank

March 2005

[email protected]

Disclaimer: This represents my views, not those of the World Bank

A. WILL INDIA BECOME AN ECONOMIC SUPERPOWER?

India currently has the 11th largest GDP in the world…

WDI: Constant 1995 US$ billion, 2002

230248268282347411414452477515637650716

11811237

14101552

19763979

10417

Sw edenBelgium

Sw itzerlandTaiw anRussia

AustraliaNetherlands

BrazilSouth Korea

IndiaMexico

SpainCanada

ItalyChina

FranceUnited Kingdom

GermanyJapan

United States

…accounting for 1.6% of the global GDP in 2002…

1.1%

1.3%

1.3%

1.4%

1.5%

1.6%

2.0%

2.1%

2.3%

3.7%

3.9%

4.5%

4.9%

6.3%

12.6%

33.0%

Russia

Australia

Netherlands

Brazil

Korea, Rep.

India

Mexico

Spain

Canada

Italy

China

France

United Kingdom

Germany

Japan

United States

…and ranks 26th in the world by total trade in goods and services (US$ billion, 2002)…

115119131133151155165172193202204209215226

289293

363374377

478481

558574

615706

815850

9251356

2374

P olandSaudi Arabia

NorwayBrazilIndia

DenmarkThailandAustraliaSwedenRussian

MalaysiaIreland

SwitzerlandAustria

SingaporeTaipei, Chinese

MexicoSpain

Korea, Republic ofHong Kong, China

BelgiumCanada

NetherlandsItaly

ChinaFrance

United KingdomJ apan

GermanyUnited States

WTO: US$ billion, 2002

India has been one of the fastest growing economies in the world over the last 20 years

Annual average growth rates of 10 fastest growing economies over 1980-2002 excl. small countries (pop < 10 million)

Source: WDI

5.3

5.4

5.6

6.0

6.3

6.5

6.6

6.8

9.5

5.2Pakistan

Cambodia

Indonesia

India

Thailand

Malaysia

Vietnam

Taiwan

South Korea

China

What does the Goldman Sachs BRIC Report say?(BRIC=Brazil, Russia, India, China)

2.5%

1.9% 1.8%2.1% 2.2%

2.9%2.4%

-0.1%

9.5%

5.6%

0.9%1.3% 1.3%

1.8% 2.0%

2.6%

4.2%

5.6%

7.7%

8.5%

-1%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Japan

Italy

Germ

any

Fra

nce

UK

US

Bra

zil

Russia

Chin

a

India

Historical (1980-2002) Goldman Sachs (2000-2050)

Goldman Sachs in their BRIC report have higher than historical projections for Brazil and Russia and lower predictions for China…

…leading India to emerge as the 3rd largest economy in 2050 (1995 US$ billion)…

2185

3297

3816

3919

5367

5596

6092

30209

35067

43926

Italy

France

Germany

UK

Russia

Brazil

Japan

India

US

China

Goldman Sachs: Constant 1995 US$ billion

Note the big gap between the first three and the rest

Projecting GDP using historical growth rates, India would be the 6th largest economy in 2050

339

2598

3111

3960

4974

6458

7307

8662

16706

19233

37781

96178

Russia

Brazil

Italy

United Kingdom

France

Germany

India

Taiw an

South Korea

Japan

United States

China

WDI: Constant 1995 US$ billion

Under GS assumptions, India would be the world’s 3rd largest trader in 2050

948

1013

1238

1421

2021

2054

3018

5575

6969

13842

0 2000 4000 6000 8000 10000 12000 14000 16000

Italy

Brazil

Japan

France

Germany

UK

Russia

India

US

China

Goldman Sachs & WDI: Constant 1995 US$ billion, projected at historical Trade-to-GDP ratios

Using historical growth rates, India would be the 10th largest trader in 2050

0.4%

0.9%

2.6%

2.6%

4.1%

4.2%

6.7%

7.6%

14.7%

15.5%

21.1%

59.1%

Russia

Brazil

India

Italy

United Kingdom

France

Germany

Japan

United States

Taiw an

South Korea

China

Will India Become an Economic Superpower?

India is already a large player.

It will become larger.

But it may not become one of three giants

B. DOES IT MATTER IF AND WHEN INDIA

BECOMES AN ECONOMIC SUPERPOWER?

India is already a population superpower

58 59 60 82127 146 176

282

1262

1002

50 61 64 74 100 118

228

420

1418

1601

0

200

400

600

800

1000

1200

1400

1600

Italy

Fra

nce

UK

Ger

man

y

Japa

n

Rus

sia

Bra

zil

US

Chi

na

Indi

a

Po

pu

lati

on

(m

illi

on

s)

2000 2050

Goldman Sachs

India will be the world’s most populated country by 2050; it’s population is expected to stabilize by the year 2100 at 1.8 billion

With a PC GDP of $ 494, India today ranks 128th in the world

0 10000 20000 30000 40000 50000 60000

INDIA

US

GERMANY

FRANCEUK

ITALY

J APAN

CHINA

BRAZIL

RUSSIA

WDI: Constant 1995 US$, 2002

The fundamental challenge facing India is not to become an economic superpower but to become rich and eliminate poverty.

Alternative Scenarios

If India grew at GS rates it would be the poorest of the BRIC and G6 countries If India grew at GS rates it would be the poorest of the BRIC and G6 countries in 2050, but equivalent to a low-end high income country like Spain today in 2050, but equivalent to a low-end high income country like Spain today

If India grows at historical growth rates (6.5%) for the next 50 years, India If India grows at historical growth rates (6.5%) for the next 50 years, India would have in 2050 a GDP PC of US $ 4564 (constant 1995 US$) equivalent would have in 2050 a GDP PC of US $ 4564 (constant 1995 US$) equivalent to a lower-middle-income country like Brazil today.to a lower-middle-income country like Brazil today.

If India reverts to the “Hindu growth rate” (3.5%), its 2050 GDP p.c. will be If India reverts to the “Hindu growth rate” (3.5%), its 2050 GDP p.c. will be US$ 1723, equivalent to Iran today.US$ 1723, equivalent to Iran today.

Summary of scenariosSummary of scenarios

todayGrowth scenario 8% 6.50% 3.50%PC Income (USD) 494 18731 4564 1723Ranking of economy in 2050 11th 3rd 6th top 12Ranking of PC income today 128th 23rd 44th 77th

2050

C. WHAT MIGHT PREVENT INDIA FROM BECOMING

AN ECONOMIC SUPERPOWER?

RISKS TO GROWTH

• So far, just doing trend analysis. But economic growth can slow down as well as speed up. Countries can catch up, but

also be left behind.

• Argentina: 1889 GDP pc = 91% of US GDP pc 1999 GDP pc = 33% of US GDP pc

• What are the factors which might slow down growth in India?

1. MACRO SHOCKS

Has the economy been shock-proofed?

2. SECTORAL CHALLENGES

Sectoral growth rates since Independence

(Percent)50s 60s 70s 80s 90s

1 Agriculture and Allied 3.1 2.5 1.8 3.6 2.82 Industry* 6.3 5.5 4.1 7.1 5.73 Services 4.3 4.8 4.4 6.7 7.84 GDP (factor cost) 3.9 3.7 3.2 5.6 5.8

* Includes ConstructionSource: Central Statistical Organisation

2. SECTORAL CHALLENGES: Industry

35.724.9

17.3 15.6 15.9

22.1

26.629.6

47.050.9

42.248.5

69.5

53.1

37.4 33.3

1.9

28.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

LDCs India OECD Sub-SaharanAfrica

East Asia &Pacif ic

China

Agriculture IndustryServices WDI

India’s low share of industry in GDP compared to East Asia.

3. GROWING UNEMPLOYMENT: jobless growth?

Elasticity of Employment to GDP

1977-78 1983 1993-94to to to

1983 1993-94 1999-00

1 Agriculture 0.45 0.50 0.002 Mining & Quarrying 0.80 0.69 0.003 Manufacturing 0.67 0.33 0.264 Electricity 0.73 0.52 0.005 Construction 1.00 1.00 1.00

6Wholesale & Retail Trade 0.78 0.63 0.55

7Transport Storage & Construction 1.00 0.49 0.69

8

Finance, Real Estate, Insurance & Business Services 1.00 0.92 0.73

9Community, Social and Personal Services 0.83 0.50 0.07All Sectors 0.53 0.41 0.15

Source: Planning Commission Reports on Labour and Employment

Sector

3. GROWING UNEMPLOYMENT (cont): Will moderate growth be enough?

4. GROWING REGIONAL INEQUALITY

Central Statistical Organization

189

282

309

351

383

465

474

494

514

577

582

603

659

715

738

0 100 200 300 400 500 600 700 800

Bihar

Orissa

Uttar Pradesh

Madhya Pradesh

Rajasthan

Andhra Pradesh

West Bengal

All India

Karnataka

Kerala

Tamil Nadu

Gujarat

Haryana

Maharashtra

Punjab

State GDP p.c. USD, 1999-00

4. GROWING REGIONAL INEQUALITY (cont).

Central Statistical Organization

165

466

573

729

903

1301

1737

1924

2205

2258

2352

2352

2771

3460

3765

0 500 1000 1500 2000 2500 3000 3500 4000

Bihar

Orissa

Uttar Pradesh

Madhya Pradesh

West Bengal

Rajasthan

All India

Haryana

Gujarat

Karnataka

Andhra Pradesh

Punjab

Kerala

Maharashtra

Tamil Nadu

GDP PC in constant US$, projected for the year 2050 using historical growth rates

5. POPULATION GROWTH

1991

"BIMARU"41%

North5%

East15%

West15%

South24%

2051

South19%

West14%

East14%

North5%

"BIMARU"48%

Economic & Political Weekly, Vol. XXXVIII No. 45, November 8-14, 2003

India’s Regional Distribution of Population will Change Over Time

6. URBANIZATION

24.328.1

37.6 38.2

76.279.3

0

10

20

30

40

50

60

70

80

90

LDCs India China South EastAsia

Latin America OECD

Source: WDI

India’s urbanization has only just begun

Urbanization as a proportion of total population, year 2002

6. URBANIZATION (cont.)

If India does grow rapidly, one would expect about 75% If India does grow rapidly, one would expect about 75% of India’s population would be urbanized by 2050of India’s population would be urbanized by 2050

Urban population in 2050 = 75% of 1.6 billion = 1.2 Urban population in 2050 = 75% of 1.6 billion = 1.2 billionbillion

Urban population today = 28% of 1.002 billion = 280 Urban population today = 28% of 1.002 billion = 280 millionmillion

Urban population would increase by 920 million by Urban population would increase by 920 million by 2050 (almost 20 million new urban residents a year)2050 (almost 20 million new urban residents a year)

Can India cope with such rapid urbanization, or will Can India cope with such rapid urbanization, or will it stymie India’s growth?it stymie India’s growth?

7. ENVIRONMENTAL DETERIORATION

A lot of environmental problems diminish A lot of environmental problems diminish with growthwith growth

But not all: e.g. water.But not all: e.g. water.

Source: www.cnie.org

India - Per Capita Water Availability (in cubic meters)

0

1000

2000

3000

4000

5000

6000

1950 1990 2025

Water stress

Water scarce

8. HEALTH THREATS: AIDS

Water stress

Water scarce

Prevalence of HIV as a proportion of working population in 2001: India next only to, but well below, Sub-Saharan Africa,

0.10 0.10 0.19 0.23 0.45 0.64 0.67 0.80

8.36

0123456789

8. HEALTH THREATS (cont.): AIDS

Water stress

Water scarce

HIV Prevalence: STD Patients in South Africa, Major Urban Areas, 1990-2000 Compared to Selected States of India in 2002

(Median Prevalence in percent)

1.65.6 6.2 9.5 11.3 13.6 14.7 15.3 18.7 21.8

30.4

39.947.1

52.3 49.253.7 57.2

But are parts of India only a decade or less behind parts of Africa?

Source: UNAIDS/NACO

8. HEALTH THREATS (cont.): AIDS IMPACT

Water stress

Water scarce

9. WEAKENING GOVERNANCE

Water stress

Water scarce

10. POLITICAL RISKS

Water stress

Water scarce

India is a stable democracy (cf. China – yet India is a stable democracy (cf. China – yet to make the democratic traditions)to make the democratic traditions)

But democracies can be unstable: But democracies can be unstable: Unstable governmentsUnstable governments

Short tenuresShort tenuresRickety coalitionsRickety coalitions

Civil violence (cf. Sri Lanka, Nepal)Civil violence (cf. Sri Lanka, Nepal)

11. SECURITY RISKS

Water stress

Water scarce

Regional conflictRegional conflict TerrorismTerrorism

12. GLOBAL RISKS

Water stress

Water scarce

Global recessionGlobal recession Spread of global terrorism or other forms of Spread of global terrorism or other forms of

conflictconflict Global warming or other environmental Global warming or other environmental

threats to growththreats to growth Any slowing down of global growth will Any slowing down of global growth will

tend to perpetuate the current economic tend to perpetuate the current economic configuration.configuration.

WHAT SHOULD INDIA WORRY ABOUT?

Water stress

Water scarce

India should worry most about those risks or India should worry most about those risks or challenges which:challenges which: Will tip India from base to low case growth Will tip India from base to low case growth

(rather than high to base)(rather than high to base) Have a reasonable probability of occurringHave a reasonable probability of occurring Are at least partially within India’s controlAre at least partially within India’s control

2 leading candidates: AIDS, conflict2 leading candidates: AIDS, conflict

IN SUMMARY: THE ANSWERS

Water stress

Water scarce

Will India become an economic superpower?Will India become an economic superpower? On current trends, yes. On current trends, yes.

Does it matter?Does it matter? Yes, but primarily as an indicator of prosperity.Yes, but primarily as an indicator of prosperity.

What might prevent it?What might prevent it? 12 risk areas identified, some very serious and 12 risk areas identified, some very serious and

daunting. Lots of unknowns. Plenty of challenges to daunting. Lots of unknowns. Plenty of challenges to confront.confront.

India is certainly heading in the right direction, but into India is certainly heading in the right direction, but into unchartered territory. Its voyage will be one of the great unchartered territory. Its voyage will be one of the great voyages of the 21voyages of the 21stst Century. Century.