SECURING INDIA'S GROWTH OVER THE NEXT DECADE

By Citi India chief economist Samiran Chakraborty

India has aspirations to achieve long term economic growth in the double digits but it is a significant goal given the political cross-currents of a low income democracy and the global growth outlook.

However, we believe attaining an 8 per cent sustained growth rate will completely change the economic landscape of India, as it did for other members of the 8+% GDP growth club like Japan, South Korea and China.

To gauge India’s suitability for membership we look specifically at India and what types of pillars can be identified to drive the country’s growth over the next decade. Our model is driven by examining the drivers of change for 26 countries from 1950 onwards that have previously achieved sustained growth above 8 per cent and the key elements to create that growth.

We found that growth in labor productivity of over 6 per cent, growth in investment of over 10 per cent and growth in the overall efficiency of production (the Total Factor Productivity) of 3 per cent were the three primary drivers of GDP growth across our sample of countries. The final piece in the growth puzzle was that poorer economies grow faster and in 60 per cent of cases, those countries with 8%+ GDP growth had per capita income of less than $10,000.

In order to achieve investment growth in the double digits and to create employment opportunities for its swelling labor force, India will need to industrialize further and target manufacturing as a share of GDP to rise to 25 per cent by 2025 from its currently level of 18 per cent. To do this, a new potential leading sector in manufacturing must be identified based on size, productivity, employability, and exportability. Our analysis identifies chemicals (including pharmaceuticals and petrochemicals) as a promising candidate to move up the value chain, as well as food processing and textiles & apparel.

We estimate that, on average, a 1 per cent increase in infrastructure investment is associated with a 1.2 per cent increase in GDP growth. In the case of India, we estimate that total infrastructure spend could be around $US3 trillion in the next 10 years bringing the infrastructure-to-GDP ratio up to 6.5-7 per cent. Projects in physical infrastructure (power, ports, roads, rails, telecom), reforms in input markets (land and labor), focus on soft infrastructure (healthcare reforms, education) and the harnessing of resources (oil & gas, coal, cement, iron & steel) would all lead to higher productivity and growth rates.

Finally, exports as a productivity driver and employment creator could play a significant role in total factor productivity growth. If India can increase its exports-to- GDP ratio (including service exports) to at least 20 per cent by 2021, India's exports could reach ~$US700 billion.

The result of all of this growth would be higher per capita income, increasing urbanization, and a shift in consumer patterns as India moves up the ladder from a low-growth to a high-growth economy.

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