March 21st, 2011 14:14 EST
India Economic Juggernaut Poised to Dominate China
When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world`s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.
In 1700, India`s economic output "its gross domestic product (GDP) "was almost 9 times that of Britain`s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.
Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world`s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India`s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.
Furthermore, the US Census Bureau projects India`s population becoming the world`s largest and surpassing China in 2025. And by 2050, the Bureau sees India`s population at 1.66 billion compared to China`s 1.3 billion.
Population demographics are crucial in another sense. In Ed Dolan`s, India`s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support... India is just entering its Goldilocks period while China, like the United States, is already leaving. "
While considering demographics, Mckinsey & Co expects India`s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India`s consumer market becoming the world`s fifth largest by 2025, up from twelfth place in 2007.
Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.
However, for now it is India`s service sector that is its real star. Relative to China, and given its state of development, India`s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.
Mr Ghani also says, productivity growth in India`s service sector matches productivity growth in China`s manufacturing sector " that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth " India`s growth experience suggests that a global service revolution "rapid growth and poverty reduction led by services "is now possible. " Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.
And services continue to grow rapidly. In a February 21 article in India`s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.
India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China. "
Also, the world`s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India`s legal, political, financial and commercial framework is more familiar to developed countries` businesses that would like to do business with or invest in India.
India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world`s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.
India is rising again to become a global economic behemoth.
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Ron Robins, MBAFounder & Analyst
Investing for the Soul
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