India’s Shining Decade

by Dave

Surjit S Bhalla in the Business Standard

Two key conclusions emerge about Indian GDP growth. First, that this growth is now at a plateau level of 8-9 per cent. Second, that very soon, analysts and punters will have to change their Word documents to “India is the fastest growing economy in the world” rather than, “excepting China, India is the fastest growing economy”.

There are three separate reasons for this, all of which have been outlined numerous times before in these columns (and a detailed assessment was provided in Bhalla-2007*). The reasons refer to the broad determinants of economic growth — capital, labour and productivity. On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years). Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world. For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level.

This scenario will have predicted effects — China’s GDP growth should moderate to a less polluting 8.5 per cent in 2010 and then proceed on a declining trend for the rest of the decade. This will mean jobs for the rest of the world. The other side-effect of the China growth rate decline will be on carbon emissions. They too will decline, and allow China to reduce its carbon intensity of output to at least the world average. In stark contrast, India does not have pressure from the world community to mind its currency or emissions. The productivity growth advantage of 2 per cent a year that China currently enjoys will soon disappear, leaving India with a GDP growth rate in excess of China, and in excess on a sustained basis.

This has been a structural change decade for India. Sadly, this reality hasn’t quite seeped into the psyche and mind-set of a large body of Indian policy-makers and opinionratis. This should, will, also change in the new decade.

Technorati Tags: , ,

TwitterFriendFeedDeliciousLinkedInFacebookDiggShare