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A farewell to poverty?

India's young talent pool will help it become the world's 3rd largest economy by 2030, writes Chaitanya Kalbag.

india Updated: Oct 28, 2006 14:49 IST

India has an age advantage over both the OECD economies and its Asian rivals in its younger population, and its steady, growing affluence will help it become the world’s third-largest economy by 2030, a senior World Bank official said.

Graeme Wheeler, Managing Director Operations of the Bank, told the Hindustan Times in an exclusive interview on Thursday that reforms will lead to a significant reduction in poverty, despite the fact that India has roughly 260 to 290 million poor people living on less than a dollar a day — about a quarter of the poor people on the planet.

“Where India has been very successful is in lifting its rate of actual output growth,” Wheeler said. “At the same time you’re seeing an increase in  the ratio of investment to output. Currently around 31 percent, India’s investment ratio compares with China’s 48 percent.  India aims to raise its ratio by about four or five percentage points over the next few years, fuelled in large part by household and corporate savings.

“China is without doubt the main competitor for India, and if you look at the rates of infrastructure spending in China, there is no doubt that China has a significant edge.”

Wheeler said demographic projections suggest that by 2030 — that is, in another generation — there will be something on the order of another two billion people on this planet. “And given that you are seeing ageing demographics in OECD-type countries, then 95 percent of that population growth will occur in developing countries,” Wheeler said.

He said research suggested that “the combination of pretty steady growth, plus exchange-rate appreciation, will change the composition of the G7 economies quite markedly” over the next quarter-century.

Based on these trends, he said, by 2030 “the largest economy in the world could be China, the second-largest could be the United States, and the third-largest could be India”.

“As developed economies start to age,  you will see in South Asia younger populations, affluent populations, significantly increasing their disposable incomes and looking to invest offshore. You will see investors in Asia increasingly investing in European and US equities.”

Praful Patel, Vice-President, South Asia with the Bank, noted that during the 1990s India had succeeded in pulling 80 million people out of poverty.

Wheeler said Maharashtra officials, at talks earlier this week, were looking to grow Mumbai’s economy at about 12 percent. “But manufacturing has been stagnant for a period, so there are a lot of tricky aspects to all of this. The question is whether India is establishing the sorts of infrastructure and social policies that are capable of sustaining these rates of growth over a longer period.”  The Bank offered to pump in substantial aid for the ambitious, $60 billion plan to make Greater Mumbai a world-class city and financial centre.

Infrastructure spending

Fayez Omar, Senior Manager, India Programme said it was important to maintain perspective on issues like Special Economic Zones. “If you look at Maharashtra, Mumbai is slated to grow at about 10 to 12 percent while the hinterland has 10 of the poorest districts in India.”

Wheeler said infrastructure spending as a percentage of GDP (gross domestic product) was currently about 4.5 percent, and under the 11th Five-Year Plan the objective was to get it up to 11 percent of GDP.

Wheeler said among the powerful forces at play in this region were what he described as “agglomerations”. Manufacturing investment has come into Asia over a prolonged period, creating huge cost economies. “Asia has captured them superbly in many respects. If you look at potential trade corridors between South Asia and western China, this could be a very dynamic region.” That was why Latin America and Africa could not compete on the same scale, he said.

Although India had a huge demographic advantage, Omar said, much depended on the quality of its young people, and on their education. Primary-school enrolment performance was quite good, Wheeler said, but infant mortality numbers were not very good. “And that immediately throws up the question of the quality of education, for instance teachers not turning up for their jobs — something that Patel noted was another form of corruption, just as the leakage of public funds was.

Given India’s expansionary private sector, rising levels of individual wealth, and its status as a not insignificant aid donor, was it time for New Delhi to try and wean itself off multilateral aid?

“Every dollar that India can access today is critical,” Patel said.  World Bank aid to India, both in IBRD and IDA assistance, will total $3 billion in 2006-07, double the previous year’s commitments.  “Part of these funds are by rights India’s share of global aid,” Patel said.

Asked what he felt about India’s continuing caution on entirely loosening capital controls and full rupee convertibility, Wheeler said developing-country foreign exchange reserves were roughly in the order of $2.6 trillion, about a 60 percent increase over the past three years.  Higher reserves, and the ability to refinance debt at lower interest rates overseas, gave governments the comfort of stronger balance sheets.

But India needed to be more aggressive on its exports. “By and large, given that global GDP is about $40 trillion, then countries can more rapidly achieve prosperity if they are exporting and trying to improve their competitiveness over time.”