India’s potential growth over the next decade could be around 6 per cent. However, the nation can increase this growth to 6.7 and even 8.2 per cent through a combination of increased labor participation and investment rate, said Goldman Sachs in a report. India can increase potential growth by any, or a combination of four levers including; increasing investment to GDP ratio, higher investment in human capital, labor force participation rate (LFPR) increase and productivity (TFP) growth. These levers by themselves can each boost potential growth by 50 bp to 100 bps over the next ten years. For India to grow at an even faster pace, increasing productivity growth is going to be critical, analysts said in the report.
According to the analysts, increasing investment to GDP ratio to the previous peak level of around 40% can alone boost potential growth by 50bp. If the labor force participation rate (LFPR) can be brought back to the previous peak level of 61%, it can boost potential growth by 100bp. “However, if India is to grow at an average of 8%+ over the next ten years, a combination of all the four levers will have to come together, and create a Goldilocks scenario,” analysts said. According to their estimates, along with increasing investment rate and labor participation to previous peak levels, an increase in TFP growth by 50bp to 3%, and higher human capital growth at 1.3%, could together increase potential growth to 8.2% (average) over the next 10 years.
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Levers for 8.2% growth over the next decade
– Investment to GDP ratio increases from current 32.5% to 40% (India’s peak investment rate in 2010-11) over the next ten years. This, by itself can boost potential growth by 50bp, all else constant.
– Labor force participation increases from current 52% to 61% (Peak in mid-2000s). This, by itself can boost potential growth by 100bp, all else constant.
– Productivity or TFP growth rate increases from the BAU scenario of 2.5% (Average in last decade from 2011-2019), to 3.0%.
– Human capital index growth increases from 1.1% (average during 2011-2019) to 1.3%.
Goldman Sachs, however cautioned saying long-term projections are subject to a great deal of uncertainty. Over the last two decades only, there have been two large shocks — the GFC and the Covid-19 pandemic — which has taught that growth transitions are unlikely to be devoid of volatility. “Experiences of other emerging markets are littered with examples of failure, partially due to sub-optimal policies. Our growth projections are based on a supply side framework based on clear assumptions, which can potentially help investors to assess future developments, and benefit from emerging opportunities,” it said.
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Along with creating physical infrastructure (through higher investments), India needs to remain steadfast on structural reforms while creating a conducive environment for millions of workers to be gainfully employed, to realize its true growth potential, Goldman Sachs added.