India’s demography, and a focus on credit and trade, can make it a global growth driver.
By Janak Priyani & Utkarsh Katyaayun
The recent Budget and Economic Survey laid down several strategies for reviving investor confidence and boosting economic growth. Even as the IMF reduced its global growth forecast for 2019 by 10bps to 2.9% year-on-year owing to negative surprises to economic activity in emerging economies, we believe emerging economies, especially India, will drive global growth.
Global growth has been driven by different countries in different periods. After the Second World War, Japan led growth till the 1980s; since the 1990s, China has held the baton, but China’s share in global debt has gone up from a meagre 7% in 2010 to over 16% by end-2019. Today, as China slows down, it is yet to be seen who will drive growth. India is the fifth largest economy by GDP and the four above it have gone through their high growth phase.
Demographics: Relative to 1960, the share of global population above 65 years has more than quadrupled, while the share of working age population (between years 15 and 64) has increased just 2.8 times; relative to 1980, productivity has only risen by 1.3 times. Last time the world escaped the Malthusian postulate (growth potential being constrained by population growth outdoing resource growth) was when the Industrial Revolution improved productivity, which massively improved agricultural productivity. Unless there are similar increases in productivity, a shrinking workforce and slowing productivity growth will drag the global GDP growth down. India doesn’t face this drag; in 2018, India entered a period of high demographic dividend because the share of working age population became greater than that of dependent population. This period is expected to last until 2055. For most countries periods of high demographic dividend have been coupled with high growth—Japan (1964-2004), China (1994-2031) and South Korea (1987-2027). Given that India is the second most populous country, focusing on workforce skilling, quality education and employment can have huge dividends.
Credit: Debt as a percentage of global GDP has reached unprecedented levels (300% of global GDP). If growth slows down, which is essential to service debt, extremely high levels of debt can lead to a crisis. In an ideal scenario, as debt increases, the cost of capital also increases. But over the last decade, interest rates have remained fairly benign in developed markets. This led to low or negative yield on fixed income instruments. And due to a dearth of alternate sources, investors have been rushing into equities, especially non-cyclical, raising their valuations. The S&P 500 was the best performing broad-based index over the last decade. But its P/E rose from about 15 in 2010 to 22 in 2019. Stock markets rise because investors perceive higher earnings. A high and rising P/E indicates that investors are willing to pay more and more per dollar of earnings in a company. The global economy faces high debt, putting global growth at risk. The scenario is stable till economic fundamentals are stable and investors are not over-exuberant. India is uniquely placed as the least levered large economy (total debt-to-GDP ratio of 150%). In the coming decades, private credit has the potential to play a critical role in India’s growth story.
Trade: Since the Global Financial Crisis (GFC), global trade as percentage of c has fallen to 57.9% in 2019 from 60.7% in 2010. For a sample of 50 countries (including the G20), the correlation between exports and imports as percentage of GDP was 96%, implying that restricted imports restrict the capacity to export. The recent trade conflict has made permanent dents in global supply chains. However, India’s share in global trade is just 2.3%, so there is scope for improvement and also an opportunity. The Budget had a slew of measures to boost exports. MSMEs have a big role to play and need to contribute more than 50% of GDP from the current 29%. While credit will play an important role in expanding operations, structural reforms in labour, land and tax regimes can make MSMEs more competitive.
These factors can drive India’s growth. As credit becomes more readily available to the industrial sector and particularly exporters, many of which will be MSMEs, firms will expand operations, boosting trade and generating employment. Increased trade in technology will help us develop expertise in the sectors of the future. Despite the current slowdown, India is likely to bounce back in the next few quarters given its strong fundamentals and recent structural reforms. With a huge growth potential in demographics and a sustained focus on trade, and credit, India will be ready to take the baton from China and drive global growth.
Authors are young professionals, NITI Aayog. Views are personal