Bridging the growth gap between India and China

A recent news article touts India and China to be the main growth drivers among the BRIC nations. Though the slow growth of BRIC nations has cast aspersions over the countries long-term growth, according to a Credit Suisse report, China and India could sail through their respective economic crises with the help of various reforms. As a boost to Indias confidence the report claims the growth gap between these two countries would be bridged. China's growth rate could be slowed down by factors such as moderate investment, spending and constraints on labor. The report also states that India has the best potential to obtain high growth in the longer term. Goldman Sachs believes India has the best potential GDP growth rate but furor over effective policy changes is an impediment. By 2013, Goldman Sachs states that Indias GDP would increase. A decrease in oil prices, increase in exports abroad and key structural reforms could sustain Indias growth trajectory into 2013. Indias growth was at 8-9 per cent before the global financial crisis in 2008. The growth rate in 2011-12 slipped to 6.5 per cent and the current GDP is at 5.3%. To return to the 8 percent plus GDP India needs a variety of Fiscal reforms, boosts in investments and undoubtedly policy efficacy. The below exhibit shows the key growth drivers of the Indian Economy over the years:

1950 -1980

This period had substantial public investment in heavy and basic industries, infrastructure and agriculture. 1981-1990

Industrial and trade reforms that facilitated capacity expansion, modernization and productivity in industrial sector were the norm during this time.

1991- 2010

The start of Economic liberalization and expansion of service industry, increased private consumption thrived during this era. 2011- 2020

Investments in Physical, Social and Agricultural Infrastructure are expected to contribute towards the growth of the Indian Economy. The Key Growth Drivers Indias long term sustainability is imperative on certain key growth drivers. Inclusive growth must be the norm for India and this would be possible by investments in Physical infrastructure, Social Infrastructure and Agricultural Infrastructure. Foreign Direct Investments, technology sector, service sector expansions also play a major role in facilitating Indias growth.

Physical Infrastructure

Dun & Bradstreet estimates that Infrastructure investment would increase 12.1 % GDP in 2020 from 7 % in 2012. Increase in urbanization, middle class incomes, young working demographic are cited as the reasons for the same. A paradigm shift is expected to occur which focuses on Rural infrastructure development. An increase in investments in the semi-urban and rural regions would provide higher income, employment and transport facilities in these regions would also see a marked development. The various sectors in Physical infrastructure: Power Sector Increase in urbanization would have to be met with an increased power demand. According to Investment Commission of India, more than 78,000 MW of additional power generation capacity is being planned. 9 Ultra Mega Power Projects with power generation capacity of 4,000 MW each are being set up for the same. Transmission and capacity addition in electricity generation would require investments in the coming areas. Reducing import duties and capital goods prices would attract private investment in this sector. Oil and gas A growth in the transportation and industries sector would definitely trigger an increase in oil and gas. But instead of depending more on importing oil, the Government of India must invest in research and development of technologies for efficient use of fossil fuels, renewable energy, alternate fuel resources and exploration of oil in places like the Krishna-Godavari Basin. Roads Linking the metros namely Delhi-Mumbai-Kolkata-Chennai is an ambitious project that would facilitate easier transport of goods, connectivity as well as economic growth by means of road tourism. Private investment could be attracted by the Build, operate and transfer projects and other policy initiatives for road construction projects. The number of privately owned vehicles is bound to

increase in the near future thereby increasing congestion of roads as well. This can be tackled by allocating more investments in the public transport system. Railways According to an estimate of the Railways Ministry, demand for passenger and freight services would increase which would require expansion of 25,000 kms of new lines by 2020. Manufactured products are deemed to occupy the larger share in bulk cargo. Surge in population and traffic congestion in the major metros could be tackled by developing underground or flyover mass rail transport systems. Air Though in the current scenario, the Aviation sector is floundering, FDI in this sector is expected to pull Civil Aviation from the brink of disaster. Investment of added 0.7% of GDP is required towards aviation infrastructure by 2017. Improving existing airport facilities and developing newer ones in tier 2 cities would also contribute towards growth.

The exhibit gives an over view of the increasing private sector contribution in infrastructure

Social Infrastructure Inclusive growth in India could be achieved by improving Education, Health facilities and Sanitation. Education Though literacy rates have been steadily increasing over the years, they are well below the upper middle income level of 95%. India has always faced a disparity in the education of males, females and between rural and urban regions. The Eleventh Five Year Plan hopes to give a boost to higher education by setting up 1455 new educational institutions comprising central universities, IITs, IIMs, NITs, IISERs, SPAs and Polytechnics. Dun & Bradstreet estimates that public expenditure in education is expected to increase to 3.9% of GDP by 2020. However other factors such as actual attendance of children, shortage of teachers and red tape in getting appropriate funds must improve. Health and Sanitation Health and Sanitation facilities of the under privileged have been major issues of concern for the Government. However the total government expenditure on health is expected to remain low at 1.5% of GDP in 2020. Hence there must be an increase in private expenditure for these sectors.

Agriculture Infrastructure A surge in population and income would cause an increase in demand of agricultural produce. Total factor productivity could be the driver for agricultural growth with a low agricultural investment rate. Productivity can be improved by investing in irrigation, infrastructure development in agriculture and agro-processing and efficient use of water and fertilizers. Droughts and famine are the main reasons that cause a drop in agricultural produce. Focus on developing irrigation facilities, constructing check dams, over head tanks, water lifting devices is the need of the hour. Though there is both public as well as private investment in this sector, timely implementation of projects is required. Investing in Cold storage and rural godowns would provide better post harvest facilities. Information technology also plays a role in agriculture. More Agricultural Information centers providing farmers information based on quality seeds, prices, demand, soil testing etc would be required.

Foreign Direct Investments India is the second most preferred destination for foreign investments after China. The Service sector inclusive of financial and non- financial services followed by telecommunication, construction, and computers have been the major beneficiaries of FDI. This year has seen a massive policy reform by the government in allowing FDI to enter the retail and aviation sector. 100% FDI has been allowed in Cold Supply chain which would develop efficient food supply systems.

Technology

Much has been talked about India as a hub for IT and ITES sectors, however other technologies namely tablet culture and wireless services also transcend India on the road to growth. Aakash tablet of Datawind is one of the cheapest tablet computers provided to students, thereby expanding digital access to the young populace. This has revolutionized the education and the electronics industry. Furthermore, the wireless market in India is expected to exceed 872 million active users by the end of 2014.

Conclusion At the rate of development in these areas barring a few hindrances, the Indian Economy looks bright and India is poised to be a country to reckon with. Hence it is only a matter of time when India would bridge the growth gap with China.

References: http://www.hindustantimes.com http://www.dnb.co.in/India2020economyoutlook http://www.indianexpress.com http://www.washingtonpost.com http://www.mydigitalfc.com