The Hindu Business Line : Overtaking US on the growth expressway?

India is set to become the world's second largest economy, after China, by 2050. In the third spot will be the US, even as India sustains an 8 per cent growth in GDP (gross domestic product) and guns for more. This is the finding of a `global economics paper' titled "India's rising growth potential" by Tushar Poddar and Eva Yi, of Goldman Sachs.

Central to the country's growth story is private sector productivity, which has been improving its efficiency `in the face of increased competition due to the cumulative effects of a decade of reforms'.

However, the FORCE factors are critical to sustaining growth, note the authors. The acronym stands for Financial deepening, Openness to trade, Rural to urban migration, Capital deepening, and Education and environment.

Financial deepening

Indications of financial deepening, which the report highlights, are total assets of scheduled commercial banks, at nearly 80 per cent of GDP, and domestic credit, which is almost 45 per cent. "Credit to private sector has grown by an average of 32 per cent over the past two years." India's growth projection bets on `policies to open up the financial sector' on track, `including the entry of foreign banks starting from 2009.'

Openness to trade

A big `X' shows on a graph that captures the positive impact of a steady downward trend in `Customs duties paid per Rs 1,000 of imported goods', from about Rs 500 in 1990 to Rs 100 in 2004.

For, in the opposite direction is total trade to GDP ratio, which has climbed, during this period, from 13 per cent to 31 per cent. "Tariffs have fallen to below 15 per cent from as high as 200 per cent as India began to reintegrate with the global economy... Exports have risen 14 times." In the past three years trade has grown, on average, 25 per cent a year, yet India's share in world trade is less than 1 per cent.

Among the advantages of increased openness, which the report mentions, are `access to superior inputs, ideas and technology to domestic firms' and improvement in efficiency driven by `increased competition from actual and perceived imports'. Again, the more efficient firms have been rewarded `by way of access to foreign markets and larger gains', and the inefficient ones penalised in the process.

Rural to urban migration

The report speaks of an `urbanisation bonus' of nearly 1 percentage point that adds to GDP growth, making the current century India's urban century. We have one in three of the 30 fastest-growing cities of the world. "In 1991, India had 23 cities with a million or more people.

A decade later, it had 35." By 2020, it is expected that cities and towns will see an influx of 14 crore people from villages. And by 2050, this will grow five-fold, to 70 crore, `roughly equivalent to the entire current population of Europe'. Aiding this process will the beneficial effects of the Golden Quadrilateral Highway project, dealt with at length in the paper.

However, at 29 per cent, India's urbanisation rate is low, compared to 81 per cent in South Korea, 67 per cent in Malaysia, and 43 per cent in China, observes the report. An insight of relevance is that "migration tends to hasten after a critical level of 25-30 per cent urbanisation is reached, and due to faster economic growth." Whether India will reap the urbanisation bonus depends on the ability of cities to address `basic infrastructure shortfalls'.

Capital deepening

An instructive chart in the report compares total factor productivity (TFP), capital stock and employment in agriculture, industry, and services, over the decades.

"Labour is nearly four times more productive in industry, and six times more productive in services than in agriculture, where there is a surplus labour." And, at $1,282 India's capital stock per capita is at a third of China's, which in turn, is around a fortieth of Japan's or the US'.

Goldman Sachs is hopeful that India has `scope for catch-up' because `China has sustained TFP growth rates of 3.5 per cent on average for 27 years over its high-growth phase'.

According to a 2002 work by Rodrik, Subramanian and Trebbi, India's TFP level is `between one-third and 40 per cent of what it should be given its institutions and geography', meaning we are far away from the `production possibilities frontier'.

Investment may need to go up by another 16 per cent of GDP to aim at a sustained economic growth rate of 10 per cent.

Going by the GES, or growth environment score, which compares India with its peers on components such as inflation, government deficit, external debt, investment, education, life expectancy, political stability, corruption, the Internet, and so on, one sees a 2.8 percentage point `growth potential' if India were to move `to the best in its class of low-income countries'.

Education and environment

A growing Indian economy may witness disturbing divides in urbanisation and education. So, "with rising aspirations, it is critical for the economy to have `inclusive' growth," declares the report. Sans education and labour market reform, we may `kill the growth goose'. Also, `the demographic dividend may not materialise if India fails to educate its people.' The success of elite students from the IITs and IIMs masks `the generally abysmal state of higher education in India', rues the paper. "Higher education remains heavily regulated, with little to encourage private-sector participation or innovation." Dangerously, lack of proper education can be a critical constraint to the growth of the IT sector. In a section titled `Back-office to the world', one reads about the two spill-over benefits of the IT industry.

One, "it has provided powerful incentives for students to invest in IT skills"; and the pool of technology-skilled labour has been available for other sectors too. And two, the IT sector has had `a demonstration effect on other domestic firms, which also ramped up their technology spending, thereby boosting productivity'.

With increasing urbanisation, the risk of environmental degradation looks real. Especially so, because from 2007 to 2020, we are likely to use five times more cars and three times more crude oil.

An earlier paper from Goldman Sachs, titled `Dreaming with BRICs: The Path to 2050,' by Dominic Wilson and Roopa Purushothaman (2003) had projected a 5.7 per cent GDP growth based on estimates that Indians would consume 3.5 times more cars and 2.3 times more crude oil between 2007 and 2020.

While 2050 looks like too long a shot to predict, it may be heartening to know that when India becomes number two in the world, it would be a case of coming back a full circle to circa 1770, when the industrial revolution was around the corner. India was then contributing more than a fifth of total world output and was the second largest economy in the world.