India, Ancient Economic Behemoth, to Overtake China

By Ron Robins, Founder & Analyst, Investing for the Soul

Blog Enlightened Economics; twitter

First published March 20, 2011, in his weekly economics and finance column at
alrroya.com

When Europe was going through its murderous medieval period, India was an
economic behemoth controlling from one-fourth to one-third of the world’s wealth.
After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended
into fractious internal wars. This gave the British with their East India Company the
opportunity to seize and control vast Indian assets, eventually assuming supremacy
over all India.

In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9

times that of Britain’s. By 1947, just before Indian independence from Britain, the
tables had turned dramatically with British GDP about 1.2 times that of India,
according to data by Angus Maddison in his study, The World Economy.

Now, the International Monetary Fund (IMF) believes the Indian economy has grown
to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is,
equalising exchange rates given the purchase of a set basket of goods. A Citi study
reviewed in The Times of India on February 23 said that based on PPP, India will
have the largest economy in the world by 2050. And the World Bank suggests that
India’s economic growth rate could surpass that of China this year. The Indian
government is projecting 2011 GDP growth of near 9 per cent.

Furthermore, the US Census Bureau projects India’s population becoming the world’s
largest and surpassing China in 2025. And by 2050, the Bureau sees India’s
population at 1.66 billion compared to China’s 1.3 billion.

Population demographics are crucial in another sense. In Ed Dolan’s, India's Secret

Weapon in its Economic Race With China: Demographics, November 11, 2010, he
writes that, “rich countries with slow population growth have high dependency ratios
because they have many retirees. Low-income countries with fast population growth
have high dependency ratios because they have lots of children. In between these
two states, countries go through a Goldilocks period when the working age
population has neither too many children nor too many parents to support... India is
just entering its Goldilocks period while China, like the United States, is already
leaving.”

While considering demographics, Mckinsey & Co expects India’s middle class

population to grow from 50 million in 2007 to 583 million by 2025, while over 291
million will move away from desperate poverty to a more sustainable livelihood.
Mckinsey also sees India’s consumer market becoming the world’s fifth largest by
2025, up from twelfth place in 2007.

Such consumption growth implies enormous economic investment. And in fact, in the
next three years, a massive $500 billion is being spent on Indian infrastructure says
Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global
Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says
that Indian wage rates and associated costs are highly favourable when compared to
China and other Asian nations.

However, for now it is India’s service sector that is its real star. Relative to China,
and given its state of development, India’s service sector is much larger too and is
thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic
Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the
growth in services has India and other South Asian countries exhibiting the growth
patterns of middle to high income countries.

Mr Ghani also says, “productivity growth in India’s service sector matches

productivity growth in China’s manufacturing sector… that the effect of services
growth on aggregate economic growth appears to be as strong, if not stronger, than
the effect of manufacturing growth on overall growth… India’s growth experience
suggests that a global service revolution—rapid growth and poverty reduction led by
services—is now possible.” Incidentally, services represent about 70 per cent of
global GDP, whereas manufacturing is much lower at 17 per cent. Thus services
represent potentially, a much higher order of growth for India than does
manufacturing.

And services continue to grow rapidly. In a February 21 article in India’s Express

Computer, it says that IT-BPO (information technology-business process
outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion.
Exports are expected to be $59 billion of that. For fiscal year 2012 the publication
says that software and services growth is expected to increase 16 to 18 per cent.

India may have yet another advantage over China: it might be more attractive to
foreign executives says Mr Devonshire-Ellis. He quizzed a number of western
executives who had worked in China and India and asked them where they prefer to
work. He said that, “the surprising conclusion was that India was preferable. Several
executives expressed a desire never to return to China.”

Also, the world’s business language, English, is used by 350 million Indians, while
about 100 million speak and write the language fluently. Moreover, unlike China,
much of India’s legal, political, financial and commercial framework is more familiar
to developed countries’ businesses that would like to do business with or invest in
India.

India has traditionally been a land of great entrepreneurial activity and wealth. The
past three centuries of poverty have been an anomaly. Now its economic growth
could soon surpass that of China and its economy become the biggest in the world
by 2050. Its population is projected to be the largest of any country by 2025. As it
grows to have the world’s biggest pool of working age individuals, its forthcoming
massive investments in infrastructure, its comparative wage cost advantages,
widespread use of English and globally compatible financial and legal structures,
India could soon become a major world centre for both manufacturing and services.

India is rising again to become a global economic behemoth.

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