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Boom with a View
January 28, 2010 02:29 PM | Bookmark and Share
KV Kamath
KV-KAMATH

As we step into a new decade, the growth drivers for the economy are diverse and robust, but so are the challenges ahead

India is today poised to enter a phase of exponential growth and development. From an unlikely global player stagnating at a low rate of growth in the 1980s, to a nation of great potential, India’s economic transformation has been remarkable. Given this transformation, and the strength of the fundamentals supporting it, the next decade promises to be exciting for the Indian economy.

To understand what is possible, I always look at proxies from the world around us.  The best and most recent example is that of China. China grew at a CAGR (compounded annual growth rate) of 9.5% for over 25 years since it began its economic reform process in 1979. The impact of such high growth was phenomenal. China’s GDP grew tenfold over this period. According to China’s official statistics, the poverty rate fell from 53% in 1981 to 2.5% in 2005. The wealth creation and infrastructure development in China is there for all to see.

Over the next decade, we can expect to see similar trends in the Indian economy. Currently, we are at the beginning of a similar high growth phase and all factors indicate that such a trajectory is sustainable.

Growth Drivers
To understand what will drive growth, going forward, one needs to look at the evolution of the Indian economy over the past decade and identify the structural factors that drove our recent 9% growth levels. It is important to understand that, while the reforms process laid the foundation of a competitive economy, our growth drivers were based not only on policy action but, to a large extent, on strong fundamentals. As we look ahead at the next decade, let us analyse how some of these fundamentals will shape up.

Demography and Workforce: Demography has been one of the most important drivers of growth in India. With a population of this size, India is home to the world’s largest middle class. In addition, the availability of a low-cost and yet highly-skilled workforce has made India the most attractive off-shoring destination.

By 2020, the demographic advantage of India will become even more significant. This will have the following positive consequences: firstly, a large working population coupled with a low dependency ratio that would mean a higher savings rate; secondly, higher consumption and spending patterns of a young population will drive domestic demand. The low level of dependency will impact the savings rate positively with very little ‘dis-saving’ in the economy. This would, in turn, lead to a growth in future capital formation.  

Infrastructure Development: We have already seen that economic growth and rising incomes result in increased demand for infrastructure development. Over the next decade, this phenomenon is going to accelerate in the Indian context. The experience of South-East Asian economies highlights that rapid and large-scale infrastructure improvement becomes a reality once the growth process is firmly established, owing to greater demand and availability of financing. The recent emphasis on infrastructure development in India is also indicative of the fact that we will be seeing significant activity in this space, going forward. Over the next decade, infrastructure investments and the trickle-down effects of infrastructure spending and development will emerge as another pillar of growth for our economy.

Services: The services sector has been the highlight of growth for the Indian economy in the past decade. Rapid advances in technology have led to the dissolution of geographical boundaries and reduced entry barriers for knowledge-based businesses. India has been able to convert this global phenomenon into a growth opportunity by sublimating its knowledge capital into wealth creation. Over the next decade, it is expected that the services sector will continue its growth across the value chain from back-end volume-centric jobs to specialised work.

Industry: Over the past decade, doubts about the ability of the Indian manufacturing sector to survive in an era of global competition have been laid to rest, with greater operational re-engineering and a strong focus on quality and efficiency. Indian corporates have not only competed successfully with foreign firms in domestic markets, but have also expanded overseas through organic and inorganic channels. Again, this is only the beginning of the curve.

By 2020, Indian industries will assume global prominence. The outsourcing phenomenon will spill over to the industrial sector where India will emerge as a hub for specialised manufacturing goods like automobiles, pharmaceuticals, biotechnology and telecommunications. Over the next 10 years, most of these industries are projected to grow at impressive rates. The growth of the industrial sector will be based on technology and research & development platforms, and the ability to innovate to drive down costs. Indian industry will see growing demand from the Indian consumer as well as growing market share outside India.

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  • Boom with a View
    As we step into a new decade, the growth drivers for the economy are diverse and robust, but so are the challenges ahead


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