India 2050: Updates

I found a copy of the latest Goldman Sachs BRICs report, here (pdf). The report projects that India's real GDP will exceed that of the US as early as 2040.

Several readers have expressed skepticism at the report. These projections are just that, projections. There are many assumptions and some of them quite outlandish. There are many things being considered by leading economists about the BRICs phenomenon in general and India's potential in particular. One of them is whether India's economy has undergone a fundamental structural change. I think the answer is obvious, it has.

But whether these projections will be met is another matter. Quite obviously the current sectoral composition (60% of the workforce in Agriculture which contributes 30% of the GDP - with significant Government interventions) will not lead to this. Congress is making a big bet on the SEZ policy and as things stand, even that policy may be halted or at least slowed down because of fierce political and public opposition.

We definitely have a consumption driven growth pattern now, which never existed in the days of the license Raj. Just ask one of the socialists to give up their shiny vehicle and buy an Ambassador instead. Are they even making those things these days?

There are some good news. The Tatas acquired Corus. Ambanis expect $20 billions plus retail revenue by 2010. The PM is openly hailing the auto sector, which is expected to grow up to $145 billion and employ 25 million people by 2016 (remember the outcry when the auto sector was opened up?). S&P increased India's credit rating to investment grade.

But the fundamental risks still remain. The education system remains within socialist clutches. There are concerns related to budget deficit. Already a number of populist measures are being considered for the upcoming budget. Moody's has expressed doubts about the sustainability of the current growth rate.

Moody's Vice President Kristin Lindow estimated the economy's long-term potential growth rate at 6.5 percent but said it could grow faster than that for the next year or two. [...] "India cannot continue at 9 percent-plus growth momentum as capacity bottlenecks may prove a constraining factor," Lindow told a news conference. "Inflationary impulses emanate from capacity and infrastructure constraints, including a shortage of skilled labour that has led to steep wage rises."

I believe the biggest risk will come from divisive politics. India may even cease to exist in its current form before 2050. For some interesting updates on these issues, read RealityCheck.