• The Invisible Hand

Will India become the Next Global Economic Powerhouse?

Twenty years ago, economically China was nothing, yet now it is a global economic power. Could another country emerge in the next 25-50 years and could it be India?

India is already the world’s fastest growing economy (8.4%) but the main reason hinting to fast growth in the long-run is its demographic dividend. India has the world’s second largest population and 50% of people are below the age of 24. This will be greatly beneficial to India in the future, because they will have access to a youthful and populous workforce. Meanwhile regions such as Europe and even China have entered their ‘demographic window’ and are starting to experience problems with an ageing population.

Although labour supply is not an issue for India, labour quality might be. Unlike developed countries, the productivity of the labour force is held back by inadequate education and healthcare systems. India is plagued by high infant mortality and a rapid spread of AIDS in recent years. Most citizens lack access to healthcare and if so it is often expensive. In education, literacy was only 74% in 2011, although there are regional differences and Kerala has a 94% rate. In general, India is a diverse economy with radically different levels of development between regions so we should be careful not to treat it as homogenous.

Compared to other countries India has a remarkable level of political stability. They are the world’s largest democracy which has helped them forge strong international relations. While it is sometimes arguable whether democracy leads to economic growth, for India greater awareness of the citizens needs will only help the economy. However, since India is almost four times as big as the next democracy, it could be challenging for the government to direct growth as China did. On a local level there is poor governance, corruption and excessive red tape.

India is not a weak economy at the moment; it is the third biggest in PPP terms and the fastest growing. Quite surprisingly its structure is very different from most developing countries. Manufacturing is still small in India, but it is growing at 12%. Instead of industrialisation, India seems to have skipped a step and have been developing their service sector. This could help India in the future when these industries will be in much higher demand. In particular, India has a world class IT system due to their large pool of highly skilled, English speaking workers. They also have a booming tourist industry which makes up 6% of their GDP.

However, it is important not to overstate the size of these emerging sectors because India is still very agriculturally dependent. This means a large component of GDP is dependent on unpredictable and irregular rainfall. Climate change is likely to intensify these risks, particularly as India has a long coastline and many industries are reliant on the sea. A deadly heatwave occurred in 2015 and as transport use shifts from bicycles to cars, the problem is only likely to get worse. India is also vulnerable to energy shocks because they import 70% of their energy, however, in the future the potential of solar energy is massive, given how much sun there is. It is important to remember that these vulnerabilities mean the prospects for India’s economy could change quickly, so don’t take anything for granted when it comes to India’s economy.

Although India is a large economy, poverty remains a significant problem. Infant mortality is high; 5 million children under 5 die each year. 200 million people lack sufficient food, 25% of children don’t have access to education and 12.4% of people live in extreme poverty. It will take a lot of growth to overcome these issues and improve GDP per capita quickly, although China proves it is possible.

Overall, India’s growth prospects seem good. It currently lacks much of the infrastructure of a developed country and undoubtably it will take a lot of time, but India’s growth rate should continue in the long-run. Its demographic dividend will deliver in years to come and its focus on 21st century service industries will help it remain competitive in the long-run.

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