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Economy Dec 11, 2012

Can the US be right about India outpacing China by 2030?

By Uttara Choudhury

New York: Dragged down by subdued manufacturing, India's economic growth slid to 5.3 percent in the September quarter, its lowest levels in three years. Yet, a US intelligence report released on Monday had a sunshiny forecast: A surging India, along with decelerating China, will dominate the world economy amid the gradual decline of the West by 2030.

US intelligence analysts say that in less than two decades, Asia will overtake North America and Europe combined in global power by 2030. China has powered ahead, but India's turn will come after 2015 even as China's fortunes start to slip. We are told that by 2030, Asia driven by India as much as China "will be well on its way to returning to being the world's powerhouse, just as it was before 1500."

"As the world's largest economic power, China is expected to remain ahead of India, but the gap could begin to close by 2030," said the "Global Trends 2030: Alternative Worlds" report issued by the US National Intelligence Council, the brains trust of the US intelligence community (more here).

In 2030 India could be the rising economic powerhouse that China is seen to be today. Reuters

"India's rate of economic growth is likely to rise while China's slows. In 2030 India could be the rising economic powerhouse that China is seen to be today. China's current economic growth rate - 8 to 10 percent - will probably be a distant memory by 2030," it added.

Can India become the fastest-growing country in the world?

We have seen that a growth rate below 6 percent for the third quarter in a row is damaging for India. The country has to aspire to near double-digit expansion to provide jobs for a demographic bulge of young people set to explode onto the workforce.

India is currently struggling with high inflation and high interest rates, coupled with a wide fiscal deficit, weak currency, and uncertain policy environment, which have hit both consumption and investment.

Finance Minister P Chidambaram has made clear that he understands the importance of winning back investors' confidence. That stands in contrast with his predecessor, Pranab Mukherjee, who scared off foreign investors with confusing tax reform proposals and failed to drive through any major reforms during his near four-year term.

While New Delhi's initiative on multi-brand retail has boosted the stock market, it's still not clear whether foreign investors will take advantage of greater access to industries such as aviation and insurance given India's other looming uncertainties. Still, the government's policy efforts have reversed a trend of falling inflows of overseas money, after foreign direct investment fell 33 percent in the first six months of this year. Foreign capital entering the Indian equity markets surged $5.3 billion since India began rolling out policy changes, taking the year's total inflows to $18.1 billion.

Manufacturing holds the key

Reforms may restore some of India's growth but economists say India needs to make investments now in ports, roads, airports, railways and encourage the manufacturing sector. India's current growth is capital-intensive, fueled largely by the growth in services like IT and high-end manufacturing.

"Compare the number of Indians employed in the formal manufacturing sector with that in China. There is a multiple difference - 7 million in India and 100 million in China. India's services sector is just not going to be able to employ that many Indians. It is going to be able to generate lots of revenues as it already is but to soak up India's surplus labour force, it would be desirable to see labour-intensive, relatively low, value-added manufacturing," said Edward Luce, the author of In Spite of the Gods: The Strange Rise of Modern India.

"There are lots of sectors in the Indian economy that are already competing brilliantly on the global stage. And, there are more sectors today than there were two years ago. The situation improves all the time. There's no doubt about it - India can be a global economic powerhouse. It is really a question of the speed of getting there," added Luce.

Technological innovation to move to India, China

The US report said that economic growth in emerging markets was expected to drive technological innovation. It forecast companies, ideas, entrepreneurs and capital would gravitate to developing countries such as India.

"During the next 15-20 years, more technological activity is likely to move to the developing world as multinationals focus on the fastest-growing emerging markets and as Chinese, Indian, Brazilian, and other emerging-economy corporations rapidly become internationally competitive," the report said.

by Uttara Choudhury

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