Terms of Trade | Let’s discuss India’s growth forecast
Two questions require rigorous examination: Is India the new global growth driver? Where will India’s own big driver for future growth come from?
If the latest World Economic Outlook (WEO) forecasts of the IMF are to be believed, India’s GDP will grow at 6.3% between 2023-24 and 2028-29, the latest period for which these numbers are available. China’s growth will be lower than India’s throughout this period, making India the fastest growing major economy in the world.
This is not all. India’s GDP growth was higher than China’s in the three years beginning 2014-15. India’s lead was interrupted by the slowdown which began with the economic disruption of demonetisation and Goods and Services Tax (GST) and ended in the pandemic-induced contraction in 2020-21. Latest numbers show that India has reclaimed its lead vis-à-vis China. If the IMF's forecasts till 2028 hold, India would be the fastest growing major economy in 11 out of 15 years beginning 2014. This is not an insignificant achievement.
But is India now the most important driver of global growth in the world now, as many people claim?
China versus India’s contribution to global GDP
Using IMF data once again can help us answer this question. India’s contribution to global GDP (in current dollar terms) will be at least 7% in every year between 2023 and 2028. While this number has been higher intermittently, it being consistently higher than 7% is clearly a break as far as India’s long-term contribution to global GDP growth is concerned. However, this does not make India the leading driver of economic growth in the world.
Even with a sub-5% GDP growth rate between 2024 and 2028, China’s contribution to global GDP growth will be at least two to three times higher than India’s.
To be sure, data clearly shows that China’s importance as the global growth driver is coming down. Between 2010 and 2019, China accounted for 40% of overall global GDP growth. This number is projected to fall to just 20% in the period between 2019 and 2028. This number was 0.8%, 7.1% and 14.9% respectively in the 1980s, 1990s and 2000s for China.
For India, these numbers are 1.2%, 1.3%, 3.8%, 5.8% and (projected to be) 6.7% for the 1980s, 1990s, 2000s, 2010-2019 and 2019-2028 respectively.
What is really interesting is the fact that the US is set to reclaim its position as the leading driver of global growth in the 2019-2028 period after having ceded this spot to China in the 2000s and 2010s.
The US’s contribution to global GDP growth in the 1980s, 1990s, 2000s, 2010-2019 and 2019-2028 is 27.2%, 37.4%, 14.8%, 30.5% and (projected to be) 24.3%.
It is these numbers which put things in context vis-à-vis the global importance of Chinese and Indian economies.
Understanding the numbers
China is clearly past its prime as far as its importance as a driver of global growth is concerned. India’s importance is expected to increase, but there is merit in being circumspect about the claim that India has replaced China as the next global growth driver. If what is increasingly an inward-looking US is expected to remain the leading driver of global growth then one can expect that it is not going to create another China like it did in the 1990s.
There is more to this story.
One, global growth itself is much weaker now than what it was in the 2000s. IMF data shows that between 2000 and 2008, which is when the Global Financial Crisis (GFC) erupted, global GDP grew by more than 4% in three years and more than 5% in three years. If one were to exclude the base effect years of 2010 and 2021 which were preceded by a contraction in the global economy, global GDP growth has surpassed the 4% mark only once in the post-2008 period.
Also, while a GDP growth in the range of 6% to 6.5% is enough to make India the fastest growing global economy today, the Indian economy has had a better growth run in the past, especially in the 2000s. Back then the question used to be whether India could achieve a sustained double-digit growth phase. Double-digit growth is not even a part of the political rhetoric today.
To be sure, one can argue in hindsight that India’s pre-GFC boom was not without its problems. Irrational exuberance which was aided and abetted by India’s government-owned banks giving out huge loans without much of promoter skin in the game played a big role in driving in this boom. Once the GFC ended the global boom, the Indian economy was left to pick up the pieces of a twin balance sheet crisis which left both bank and company balance sheets scarred.
Looking ahead
If the pre-GFC growth in India was driven by irrational exuberance-driven investment, the post-pandemic growth seems to be driven by the consumption demand of the super-rich and perhaps an increase in debt-driven consumption by the not-so-rich. To be sure, just as the pre-GFC boom was not without an objective basis of a booming global economy and strong export demand, the current phase has had its own catalyst.
There is good reason to believe that India’s private sector salaried elite is now growing beyond the IT sector into areas such as start-ups and the next round of outsourcing in services in the form of Global Capability Centers (GCCs). While the consumption demand of this group is playing a major role in driving growth it cannot generate enough momentum to ensure even a sustained 8% plus GDP growth path for the Indian economy.
Where will India’s big driver for future growth come from?
There are different views on this question. The supply side view thinks the government's infra-boost will give a big push to India's long-term growth. There is also a demand side view which thinks the government must expand India's welfare net through programmes such as cash transfers or urban employment guarantee programmes to give a boost to mass demand. The truth, as is often the case, is more likely to be in between these two extremes and the question deserves more serious engagement than it is receiving at the moment.
While this is not to make a virtue of India’s Licence Raj era, sometimes one misses a Planning Commission-like institution which provided a platform for medium-term discussion (thanks to the five-year plans) on the economy within the confines of official policy-making circles with a lot of rigour.
Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.
The views expressed are personal
This article was amended to reflect India's growth forecast as the fastest growing economy in 11 out of 15 years beginning 2014 to 2028, as per the IMF's forecasts
