1. India can be next global powerhouse; barriers remain: EIU

India can be next global powerhouse; barriers remain: EIU

Identifying India as one of the 'few bright spots' in an otherwise gloomier global economy, IMF has also projected that Indian economic growth is set to be higher than China's.

By: | Published: November 12, 2015 1:55 PM
narendra modi

Identifying India as one of the ‘few bright spots’ in an otherwise gloomier global economy, IMF has also projected that Indian economic growth is set to be higher than China’s. (PTI)

India can be a China-like global growth powerhouse of 2020s, but it needs to address several challenges including infrastructure and gender gap to realise the potential, Economist Intelligence Unit has said.

“India is the only country that has the potential to change the world in the 2020s in the way that China changed it in the 2000s. It will probably take a little longer than that before India really takes off but, even so, it is going to be a global growth powerhouse of the 2020s,” EIU’s Chief Economist Simon Baptist said.

In a newsletter, Baptist further said that a key driver could be expanding India’s industrial base.

Acknowledging that this was indeed the idea behind the government’s ambitious ‘Make in India’ campaign, a policy to turn the country into a manufacturing hub, he said “the preconditions for a Chinese-style take-off of manufacturing do not yet exist in India”.

His comments follow a special report on ‘what is needed to unlock India’s growth potential’, prepared by EIU for ABB, a global leader in power and automation technologies.

“Basic skills and education are at a much lower level than they were in China in 2001, when its manufacturing sector globalised. There is a huge gender gap — narrowing in the case of education for girls, but still wide in employment.

“A long-standing electricity deficit and massive infrastructure needs from urbanisation are also key challenges,” Baptist said.

On positive side, India has one thing that China has — the potential to be of interest as a huge market in its own right, as well as a base for export manufacturing.

“One thing holding that back is the maze of state-level regulations and the lack of a truly national single market.

While state-based competition can be beneficial, as those states with the will can move faster, those barriers will need to be removed for India to really capitalise on its potential,” Baptist added.

A number of economists as also the government leaders have talked about India replacing China as the next driver of global economic growth, but a number of experts have warned about the challenges that India faces to achieve this feat.

Identifying India as one of the ‘few bright spots’ in an otherwise gloomier global economy, IMF has also projected that Indian economic growth is set to be higher than China’s.

Finance Minister Arun Jaitley has also said that the world needs more growth engines after the recent slowdown in China and India is well-positioned to capitalise on this opportunity and its economic growth is expected to improve despite global headwinds.

After a drubbing for the NDA alliance in politically important Bihar state elections, the Modi government has this week announced a slew of reform measures including for the power sector and on FDI regulations as it looks to reinforce its image as a growth-focussed regime.

About results of the Bihar polls, Baptist said in a tweet that “India will still be growth hotspot, but we are revising down our 2018-2020 forecast as Bihar problem means no upper house majority for Modi”.

As per the EIU report, India has become the world’s third largest economy in terms of purchasing power parity after three decades of growth.

“But its manufacturing sector has barely grown as a proportion of GDP (17 per cent) over the past 20 years. To realise its growth potential, India needs to expand its industrial base, diversify its energy mix, and upgrade its electricity and urban infrastructure,” it added.

The ‘Unlocking India’s potential’ report, commissioned by ABB, further said the government wants to increase the manufacturing output to 25 per cent of GDP by 2022, with the creation of 100 million jobs.

To expand its industrial base, India will need to accelerate and implement reforms to improve conditions for business and attract investment. At the same time, companies will need to engage actively with trends such as high-quality manufacturing, smart manufacturing practices, automation and the Internet of Things (IoT).

With industrialisation, India will need to accelerate the expansion and upgrading of its energy sector. The country already imports 75 per cent of its oil and faces persistent shortfalls in power supply and the challenges will become even greater given that manufacturing is much more energy intensive than the services sector, the report added.

When it comes to energy efficiency, the EIU specialists say India could benefit from being a late starter in this area, because it can adopt the latest technologies.

The challenge here, especially for small and medium-sized enterprises (SMEs), is access to financing because energy- efficient machinery typically has a higher fixed cost but a lower operating cost.

The EIU further said a key criticism of energy policy in India is that capacity expansion has not been accompanied by grid expansion and an upgrading of existing power plants, resulting in imbalances that prevent optimal operation of the network.

By using microgrids and renewable energy sources, the electricity supply could be decentralised, which would minimise risks while also making the power system more resilient.

“In order to sustainably develop its power sector, India needs to diversify its energy mix. The government has pledged that non-fossil-fuel energy sources will make up 40 per cent of its electricity generation capacity by 2030. It also aims to reduce the emissions intensity of its GDP by up to 35 per cent over the same time period,” it added.

India’s urban population has grown by 150 million since 1990 and the Organisation for Economic Cooperation and Development (OECD) predicts that it will grow by another 500 million by 2050.

“Without appropriate planning, say the authors of the EIU report, the pressure on India’s resources, including land, water and clean air, will intensify,” the EIU report said.

It concluded that “many of the building blocks are in place for India to transition to the next level of growth and development.

“At the same time, the country faces significant constraints on growth, especially in terms of implementing the necessary reforms and gaps in infrastructure.

“Taken together, the EIU expects economic growth in India to average 7 per cent a year until 2018, and then to accelerate to 8.5 per cent in 2019/20, making India the world’s fastest growing large economy.”

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