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

Stephen Howes, Lead Economist (India), World Bank March 2005

showes@worldbank.org 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

United States Japan Germany United Kingdom France China Italy Canada Spain Mexico India South Korea Brazil Netherlands Australia Russia Taiw an Sw itzerland Belgium Sw eden 10417 3979 1976 1552 1410 1237 1181 716 650 637 515 477 452 414 411 347 282 268 248 230

WDI: Constant 1995 US$ billion, 2002

accounting for 1.6% of the global GDP in 2002

United States Japan Germany United Kingdom France China Italy Canada Spain Mexico India Korea, Rep. Brazil Netherlands Australia Russia 6.3% 4.9% 4.5% 3.9% 3.7% 2.3% 2.1% 2.0% 1.6% 1.5% 1.4% 1.3% 1.3% 1.1% 12.6% 33.0%

and ranks 26th in the world by total trade in goods and services (US$ billion, 2002)
United States Germany J apan United Kingdom France China Italy Netherlands Canada Belgium Hong Kong, China Korea, Republic of Spain M exico Taipei, Chinese Singapore Austria Switzerland Ireland M alaysia Russian Sweden A ustralia Thailand Denmark India Brazil Norway Saudi Arabia P oland 925 850 81 5 61 5 574 558 481 478 706 1 356 2374

377 374 363 293 289 226 21 5 209 204 202 1 93 1 72 1 65 1 55 1 51 1 33 1 31 19 1 15 1

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)
China South Korea Taiwan Vietnam Malaysia Thailand India Indonesia Cambodia Pakistan
5.4 5.3 5.2 5.6 6.0 6.3 6.8 6.6 6.5 9.5

Source: WDI

What does the Goldman Sachs BRIC Report say? (BRIC=Brazil, Russia, India, China)
Goldman Sachs in their BRIC report have higher than historical projections for Brazil and Russia and lower predictions for China
10% 9% 8% 7%
5.6% 5.6% 9.5%

H istorical (1980-2002)

Goldm Sachs (2000-2050) an

7.7%

8.5%

6% 5% 4% 3% 2% 1% Germany Russia Japan China Brazil India Italy UK US -1%

-0.1 % 2.5% 1 .9% 0.9% 1 .3% 1 .8% 1 .3% 2.1 % 1 .8% 2.2% 2.0% 2.9% 2.6% 4.2%

2.4%

France

leading India to emerge as the 3rd largest economy in 2050 (1995 US$ billion)
China US India Japan Brazil Russia UK Germany France Italy
6092 5596 5367 391 9 381 6 3297 21 85 30209 35067 43926

Note the big gap between the first three and the rest

Goldman Sachs: Constant 1995 US$ billion

Projecting GDP using historical growth rates, India would be the 6th largest economy in 2050
China United States Japan South Korea Taiw an India Germany France United Kingdom Italy Brazil Russia
8662 7307 6458 4974 3960 311 1 2598 339 1 9233 1 6706 37781 961 78

WDI: Constant 1995 US$ billion

Under GS assumptions, India would be the worlds 3rd largest trader in 2050
China US India Russia UK Germany France Japan Brazil Italy 0
2054 2021 1 421 1 238 1 3 01 948 301 8 5575 6969 1 3842

2000

4000

6000

8000

10000

12000

14000

16000

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
China South Korea Taiw an United States Japan Germany France United Kingdom Italy India Brazil Russia
7.6% 6.7% 4.2% 4.1 % 2.6% 2.6% 0.9% 0.4% 1 5.5% 1 4.7% 21 % .1 59.1 %

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

1600
1 8 41

1 601

1400 2000 2050

1 262

Population (millions)

1200 1000 800 600

420

India will be the worlds most populated country by 2050; its population is expected to stabilize by the year 2100 at 1.8 billion

1 002

400 200
58 50 59 61 60 64 1 1 27 00 1 18 46 1 228 1 76

282

82 74

0 Germany UK Japan Russia US China France Brazil India Italy

Goldman Sachs

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

GERM ANY US UK FRANCE J APAN

BRAZIL ITALY

RUSSIA

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

WDI: Constant 1995 US$, 2002

INDIA

10000

20000

30000

40000

50000

60000

Alternative Scenarios

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 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$) equivalent to a lower-middle-income country like Brazil today. If India reverts to the Hindu growth rate (3.5%), its 2050 GDP p.c. will be US$ 1723, equivalent to Iran today.

Summary of scenarios
today Growth scenario PC Incom e (USD) Ranking of economy in 2050 Ranking of PC incom e today 494 11th 128th 8% 18731 3rd 23rd 2050 6.50% 4564 6th 44th 3.50% 1723 top 12 77th

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) 90s 2.8 5.7 7.8 5.8

1 2 3 4

Agriculture and Allied Industry* Services GDP (factor cost) * Includes Construction Source: Central Statistical Organisation

50s 3.1 6.3 4.3 3.9

60s 2.5 5.5 4.8 3.7

70s 1.8 4.1 4.4 3.2

80s 3.6 7.1 6.7 5.6

2. SECTORAL CHALLENGES: Industry

Indias low share of industry in GDP compared to East Asia.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LDCs India
35.7 24.9 1 .9 28.6 1 7.3 1 5.6 1 5.9 22.1 26.6 29.6 47.0 50.9 42.2 37.4 48.5 69.5 53.1 33.3

OECD

Agriculture Services

Industry

SubSaharan Africa

East Asia & Pacific

China
WDI

3. GROWING UNEMPLOYMENT: jobless growth?

Elasticity of Employment to GDP 1977-78 to 1983 0.45 0.80 0.67 0.73 1.00 0.78 1.00 1983 to 1993-94 0.50 0.69 0.33 0.52 1.00 0.63 0.49 1993-94 to 1999-00 0.00 0.00 0.26 0.00 1.00 0.55 0.69

Sector 1 2 3 4 5

Agriculture Mining & Quarrying Manufacturing Electricity Construction Wholesale & Retail 6 Trade Transport Storage & 7 Construction Finance, Real Estate, Insurance & Business 8 Services Community, Social and 9 Personal Services All Sectors Source: Planning Commission Reports

1.00

0.92

0.73

0.83 0.50 0.07 0.53 0.41 0.15 on Labour and Employment

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

4. GROWING REGIONAL INEQUALITY

State GDP p.c. USD, 1999-00
Punjab Maharashtra Haryana Gujarat Tamil Nadu Kerala Karnataka All India West Bengal Andhra Pradesh Rajasthan Madhya Pradesh Uttar Pradesh Orissa Bihar 0 100
1 89 309 282 383 351 474 465 51 4 494 603 582 577 659 738 71 5

200

300

400

Central Statistical Organization

500

600

700

800

4. GROWING REGIONAL INEQUALITY

(cont).
GDP PC in constant US$, projected for the year 2050 using historical growth rates
Tamil Nadu Maharashtra Kerala Punjab Andhra Pradesh Karnataka Gujarat Haryana All India Rajasthan West Bengal Madhya Pradesh Uttar Pradesh Orissa Bihar 0
1 65 466 729 573 903 1 301 1 924 1 737 2352 2352 2258 2205 2771 3460 3765

500

1000

1500

2000

2500

3000

3500

4000

Central Statistical Organization

5. POPULATION GROWTH
Indias Regional Distribution of Population will Change Over Time
1991
North 5% East 15% "BIMARU" 41% West 15% South 24%
"BIMARU" 48%

2051
North 5% East 14%

West 14%

South 19%

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

6. URBANIZATION
Indias urbanization has only just begun
90 80 70 60 50 40 30 20 10 0 LDCs India China South East Asia Latin America OECD
24.3 28.1 37.6 38.2

Urbanization as a proportion of total population, year 2002

76.2

79.3

Source: WDI

6. URBANIZATION (cont.)
If India does grow rapidly, one would expect about 75% of Indias population would be urbanized by 2050 Urban population in 2050 = 75% of 1.6 billion = 1.2 billion Urban population today = 28% of 1.002 billion = 280 million Urban population would increase by 920 million by 2050 (almost 20 million new urban residents a year) Can India cope with such rapid urbanization, or will it stymie Indias growth?

7. ENVIRONMENTAL DETERIORATION A lot of environmental problems diminish with growth But not all: e.g. water.

India - Per Capita W ater A vailability (in cubic m eters)

6000 5000 4000 3000 2000 1000 0 1950 Source: w w w .cnie.org 1990 2025

Water stress Water scarce

8. HEALTH THREATS: AIDS

Pr e vale n ce o f HIV as a p r o p o r tio n o f w o r k in g p o p u latio n in 2001: In d ia n e xt o n ly to , b u t w e ll b e lo w , Su b -Sah ar an A fr ica, 9 8 7 6 5 4 3 2 1 0 8.36

0.10

0.10

0.19

0.23

0.45

Water stress

0.64

0.67

Water scarce

0.80

OE CD

Su Ind bSa ia ha ra nA fric a

ME NA

Ch ina

So ut hE as t

Ce ntr al As ia So ut hA s ia La ti n Am er ica

As ia

8. HEALTH THREATS (cont.): AIDS

But are parts of India only a decade or less behind parts of Africa?
HIV Pre vale nce : STD Patie nts in South Africa, M ajor Urban Are as , 1990-2000 Com pare d to Se le cte d State s of India in 2002 (M e dian Pre vale nce in pe rce nt) 57.2

39.9 30.4 9.5 14.7 15.3 11.3 13.6 18.7 21.8

Water stress

52.3 49.2 53.7 47.1

1.6

5.6

6.2

Water scarce

G oa Ka rn at Ta a ka m il N ad u SA 19 9 SA 2 19 9 SA 3 An 19 dh 94 ra Pr ad es SA h 19 9 SA 5 19 9 SA 6 19 9 SA 7 19 9 SA 8 19 9 SA 9 20 00
Source: UNAIDS/NACO

Bi h SA ar 19 90 G uja r SA at 19 91

8. HEALTH THREATS (cont.): AIDS IMPACT

Water stress Water scarce

9. WEAKENING GOVERNANCE

Water stress Water scarce

10. POLITICAL RISKS India is a stable democracy (cf. China yet to make the democratic traditions) But democracies can be unstable: Unstable governments Short tenures Rickety coalitions Civil violence (cf. Sri Lanka, Nepal)

Water stress Water scarce

11. SECURITY RISKS Regional conflict Terrorism

Water stress Water scarce

12. GLOBAL RISKS Global recession Spread of global terrorism or other forms of conflict Global warming or other environmental threats to growth Any slowing down of global growth will tend to perpetuate the current economic configuration.

Water stress Water scarce

WHAT SHOULD INDIA WORRY ABOUT?

India should worry most about those risks or challenges which: Will tip India from base to low case growth (rather than high to base) Have a reasonable probability of occurring Water stress Are at least partially within Indias control Water scarce 2 leading candidates: AIDS, conflict

IN SUMMARY: THE ANSWERS

Will India become an economic superpower? On current trends, yes. Does it matter? Yes, but primarily as an indicator of prosperity. What might prevent it? 12 risk areas identified, some very serious and Water daunting. Lots of unknowns.stress Plenty of scarce Water challenges to confront. India is certainly heading in the right direction, but into unchartered territory. Its voyage will be one of the great voyages of the 21st Century.