India’s Journey to a US$5tn Economy: Growth Beyond Policy

Bullets Feb 2019 image


Leader Pic Feb 2019As the world’s fastest growing major economy, India’s GDP is on a path to overtake the United States’ and become the world’s second largest (behind China) by 2030[1].  It took India fifty years following independence from British rule to scale to a US$1 trillion economy in 2007.  The next trillion, however, had been added by 2014, only seven years later, and based on its current growth trajectory, India’s economy is on track to cross US$3 trillion by the end of 2019.  Further, the compounding effect of India’s rapid economic growth means that these time increments will shorten yet further, with the journey from US$3 trillion to US$4 trillion taking three years and the next trillion thereafter only two.  With a general election scheduled for later this year, one can expect considerable debate about the policies that have helped, or hindered, India on its path.  However, leaving aside the value destruction in the pre-Modi Congress government, when looking across cycles over the past 30 years or so, it is clear that governments under both parties have presided over periods of high growth.  And while the economic policies and reforms implemented by particular governments have certainly played an important role, it is clear that the underlying drivers for India’s remarkable growth include some important macro-factors that have transcended governments’ priorities and policies; ‘Growth Beyond Policy’ is a key requirement for major economies, especially in these times where policy seems more partisan, confrontational and risky.  Countries with these drivers, of which the case for India being one is examined below, are more likely to be “policy proof’, more immune to the whims of populist policies, and deliver growth in the longer term.  This month’s Sign of the Times examines these fundamental growth factors in further detail, while also identifying the measures that India’s next government should consider in order to ensure that the country continues to benefit from them as it emerges as the world’s second largest economy.


India’s Economic Growth Trajectory and the Key Factors Driving This

As highlighted previously, there has been a significant acceleration in India’s GDP expansion, corresponding to a shortening in the amount of time required to add each successive US$1 trillion of GDP to its economy, a trend that that is projected to continue to play out over the medium term (refer to Figure 1 below).


Figure 1 Indias economic journey


This acceleration is being driven by six broad-based underlying macro drivers, namely aQuote Although the last sizeable young population, rapid urbanisation, technological advances, mass consumption, and financial inclusion.  While some of these themes, such as India’s favourable demographics have formed key pillars of the ‘India Growth Story’ for many years now, others such as a role of urbanisation in India’s development has been less apparently, and the country has only recently begun to experience the convergence of all five factors at the same time with the potential to deliver compounding economic growth over the next decade, with the potential to continue broadly unhindered by government policy.  Although the last ten years demonstrates how easy it is to slow down the momentum and how difficult it is to speed it up, the figures suggest it is not possible to stop the momentum of these forces driving growth in the absence of a major devastating intervention.


Driver One: India’s Demographics: The World’s Largest Young Population

Presently, India has the largest potential labour force in the world, with c.850m people Quote Indias growthwho are of the working age, and over the next decade, this number is expected to exceed 1bn.  Moreover, India will remain a country of the young, with half the population below the age of 30 in 2030.  This is in sharp contrast to the trends expected in major industrial economies in both the West and East.  In Germany and Japan for example, only c.27% of the population will be below the age of 30.  and only 33% of the population in China.  Further, India will also add nearly 90m new households headed by millennials, who have benefitted from better education and employment opportunities and, due to higher income levels, are likely to be key drivers of consumption growth (see below).  This young population has the potential to drive both material labour productivity gains in India’s work force across key sectors like manufacturing and services, and increased consumption, thereby contributing to GDP growth.


Figure 2 Population


Driver Two: World’s Largest Mass Urbanisation Flow

India is also home to the world’s largest population flow from rural to urban environments.  Over the last 20 years, c.130m people have moved to India’s cities, and Quote Given the concentrationanother c. 300m people are expected to follow by 2030. [3]  This population flow is expected to result in c.70 Indian cities having a population of at least 1m by 2025 (up from 46 today).  Given the concentration of resources in urban environments and the opportunities for economic participation that this creates India’s cities are its key centres for economic growth, infrastructure building and the creation of meaningful employment.  Over the medium term, the absolute economic output of these cities will begin to resemble that of middle-income countries around the world.  For example, Mumbai’s economy, which should amount to c.US$245bn by 2030, will be larger than the size of Vietnam’s economy today, a country with almost 100m people.  Other cities including New Delhi, Ahmedabad, and Hyderabad will also follow a similar trajectory, with economies at US$150bn, US$95bn and US$80bn in 2030 respectively, each of them bigger than whole countries such as Hungary or Venezuela.


Figure 3


Driver Three: Mass Technological Adoption

Like most other countries in the world, India has seen rapid technological advances and adoption over the last two decades.  There has been a four-fold increase in internet users, a two-fold increase in smartphone penetration, and greater access to computing across the country.[4]  Access to technology has become increasingly democratised, and this trend will likely continue over the next decade, with more than 1bn Indians projected to have internet access by 2030.[5]  This technological penetration will be driven by: (a) the transition to mobile first internet access, with 90% of all internet consumption in the country being driven by mobile phones and (b) the growing availability of vernacular and video content, which will unlock a sizeable internet user base for consumption on digital platforms.[6]  These technological advances in India will not just transform the country’s overall standard of living by bridging key physical infrastructure gaps across areas like healthcare and education, but also directly contribute to India’s GDP growth by facilitating greater consumption through e-commerce and social media.


Figure 4


Driver Four: World’s Largest Mass Consumption Population

Over the last decade, the Indian economy has transitioned to one being driven by its middle class.  Nearly half of all Indian households are classified as middle-income or higher today (c.43%), a twofold increase from 2005 and by 2030, this transition will be complete (c.80% of all households will be middle-income or higher)[7].  These households are also increasingly being headed by millennials (born after 1980), who, on the back of improved education, higher incomes and more liberal and aspirational attitudes towards spending (as compared to previous generations) are set to drive mass consumption in India.  Moreover, by 2025 India is forecast to be home to the largest number of consumers on the planet, its population having overtaken China’s, albeit at lower disposable income levels [8].  As a result of both increased scale and increased incomes, spending across the consumer value chain (including essential categories, services and durables) can be expected to continue to increase, by up to 5.0x from current levels, with people not only looking to buy more of the same, but also upgrade to more premium brands, thereby boosting GDP growth and the resulting in the creation of a more balanced economy.


Figure 5


Driver Five: World’s Largest Shift to Financial Inclusion

Financial inclusion is arguably one of the more recent of India’s economic growth drivers to emerge, with real progress only being observed over the last five years.  A combination of technological advances and a strong push by the current government has resulted in more than 330m bank accounts being opened in the country, with c.US$20bn in new bank deposits since 2014,[9] enabling increased opportunities for economic participation for hundreds of millions of Indians.  The issuance of two new banking licenses (to IDFC Bank and Bandhan Financial Services), and the creation of so-called payment banks focused on financial inclusion has further driven banking access across the country (particularly in rural areas).  This increase in banking penetration should translate into increased financial savings and investment levels, which in turn with stimulate economic growth in the country.


Figure 6

To these five growth drivers can be added another significant factor: the ongoing peaceful development of Indian society.  The country status as the world’s largest democracy is anQuote Indias growth drivers often-quoted truism that hides what is in fact a significant accomplishment on its part.  The sheer size and diversity of India, home to 1.3bn people and 22 official languages, makes the execution of democratic processes and formation of free institutions unwieldly, to say the least. However, India is one of the oldest continuous democracies in Asia, a region in which even today many countries struggle with the implementation of transparent representative rule. Moreover, India has been able to maintain its form of government at levels of national prosperity well below those considered the threshold required for sustainable democracy, with a GDP per capita of US$6,000 seen as a floor below which democracies commonly fails.  By contrast, India’s GDP per capita today is still only c.US$2,000 and has been significantly lower throughout its democratic existence.


Against this backdrop, the fact that it has delivered what have been considered generally free and fair elections for 70 years, including multiple peaceful transitions of power Table Governement successes- 2between parties is a testament to the strength of India’s democracy, and as its society continues to advance peacefully, India should continue to reap societal and economic benefits in the years to come, including higher human capital accumulation, higher political stability, lower inflation and greater economic freedom.  Stepping back, these five (or six) drivers had been largely independent of government policies and have for much of India’s independent existence escaped policy makers attention.  Financial inclusion is an exception and demonstrates how policy to spur a major driver can add to the innate drivers already present in India.  India’s growth drivers are the (near-) inevitable result of India’s history, demographics, geography and geopolitical positioning, thereby transcending any one government’s policies or priorities.  Having said that, there are of course a range of government actions over decades that have intentionally or inadvertently lit the spark or added fuel to the fire for these trends (see inset).   Further, as stated above, India’s macro-economic growth drivers are now converging and reinforcing one another in a virtuous circle enabling further development.




Figure 7 Indias Virtuous Circle


What Can India’s Next Government Do to Help and Not Hinder India’s Momentum?

In a detailed paper on the philosophy, policy and practices that needs to underlie the rapid opening of India, ‘India Wide Open’, it was clear that a country of the scale and complexityQuote Ancient India Philosophy of India could not be managed top-down; no government could be smart enough.[10]  Government needed to set the ground rules such that the nation could prosper.  This is a difficult task in its own right.  The five drivers highlighted above have transcended government’s ability to directly drive economic growth in the past, and all other things being equal will continue to do so over the next decade.  There is a case for India’s next government, rather than trying to harness or further promote these drivers, getting out of the way and letting these forces run their course.  Ancient Indian philosophy stresses that observation can be more powerful than action, and India’s leaders would be well served to follow this maxim.  Rather than seeking to over-focus on measures that directly push GDP growth – there is of course a place for this – the government should instead direct its efforts to two ancillary areas, namely removing obstacles to these drivers’ continued ability to deliver growth and addressing any inadvertent imbalances that may arise from the effects of the unchecked growth drivers.   Policy priorities in this regard should include the following:

1. Removing Obstacles: Reforming Financial Markets. India’s financial sector today is ill-equipped to support another decade of rapid growth for the country.  With India’s public sector banks recording total non-performing asset levels equivalent to almost 20% of total loans, it is clear that these institutions have been far left behind by India’s private sector banks, which have rapidly innovated and scaled.  India’s challenge, however, is that despite their clear inefficiencies, these public sector banks control c.75% of the country’s deposit base, aided in large part by protection from the government and the Reserve Bank of India.  If India is to truly benefit from its recent and rapidly growing wave of financial inclusion, these protections will need to be lifted and India’s public sector banks will need to be either privatised or re-structured.[11]  At the same time, Indian regulators will also need to provide an accommodating regulatory environment for technology-enabled start-ups that are tackling core issues in payments, savings, lending and insurance.

2. Removing Obstacles: Shifting to Sustainable Energy Consumption.  Almost 85% of India’s energy is currently sourced from fossil fuel, with coal alone accounting for c.50% of total energy consumption.  India is already the world’s third largest energy consumer and given the rapid levels of growth and urbanisation forecast over the next decade, its consumption will continue to grow and likely intensify.  However, its model of energy consumption is both financially and environmentally unsustainable, and India will need to find a way to leverage its natural advantages and resources to develop renewable energy as a viable alternative source of energy, without compromising on overall growth.

3. Removing Obstacles: Providing Mass Education to Create Opportunities. India will only truly reap its demographic dividend if it is able to convert what is today a large pool of unskilled labour into valuable human capital at scale. [12] This will require: (a) a fundamental overhaul of India’s education sector, which faces a number of structural challenges and lacks the capacity and quality across the value chain to adequately equip its vast population for the new economy; and (b) the passage of key labour and land acquisition reforms (that successive governments have failed to implement), which will incentivise Indian companies to set up new factories and create more private sector jobs.

4. Address Imbalances: Building Smart and Scaled Infrastructure to Avoid Slumification. Current infrastructure levels in India are ill-equipped to deal with the waves of urbanisation that the country is currently experiencing and will continue to experience over the next decade.  India will need to design sustainable and efficient urban habitats that maximise the value of its cities’ human capital in a cost-effective manner if it is to unlock the economic and social potential of its growing urban environments, which in turn will require a radical redesign of future cities based on high density habitats.[13]  In the absence of scaled and smart planning, the influx of inhabitants will drive rapid slumification, and grow exponentially the population of currently 100m Indians living in slums today.  Transforming infrastructure through the physical build out of roads, bridges and buildings will likely be insufficient to achieve this and India will also need to leverage digital technology to overcome key physical infrastructure gaps in critical areas like banking, financial services, healthcare and education at scale and in a cost-effective manner for both existing and new urban inhabitants alike.

To the above list of actions must of course be added the continuing fight to reduce corruption.  Despite ongoing efforts by the current government, India in 2017 dropped two places in Transparency International’s Corruptions Perceptions Index, down to a lowly 81st, below China and dozen sub-Saharan African countries.  Corruption slows growth, siphons off wealth, and destroys critical trust in core institutions, and India’s leaders will need to do more to if the country is to reap the full benefit of its macro-drivers.

However, it is important to recognise that over the medium term at least, India’s growth drivers alone will carry it forward, regardless of the government’s ability to execute on the above, anti-corruption efforts aside. The country’s path from under US$3 trillion to a GDP of US$5 trillion over the next five to six years appears to be reasonably clear.  This transition already promises to fundamentally change the face of the country, impacting a wide range of areas and metrics.

The table below highlights the nature of the transformation India has undergone and is likely to continue undergo between now and c.2024


Figure 8

Key Conclusions

The India story has momentum beyond the politics of India.  As the last Congress government demonstrated, the short-term penalty for interfering with this momentum is high and can damage economic growth, the currency and key financial metrics.  Prime Minister Modi has no doubt added impetus and some valuable structural changes to the story.  However, the GDP growth story overall, driven by the powerful momentum of people related forces like demographics and urbanisation and empowered by democracy, continue unabated.

Having been a long time coming, India’s growth story today appears to have reached an inflection point with rapid continued economic expansion all but inevitable.  The core growth drivers creating this have been in place for years or even decades, but have now reached the individual and collective mass to transform the country: the demographic explosion of young people, better educated than their parents and increasingly digitally connected, flocking to cities where the density of resources and opportunities for inclusion are driving economic participation on an unprecedented scale is driving transformational growth for India.  When India hits a GDP of US$5 trillion in the middle of next decade, not to mention the US$8 trillion it can achieve by 2030, it will be a vastly different country from the one it is today in terms of income per capita, the mix of its economy, consumption and spending patterns and the sophistication of key industry sectors.  And while on an absolute (nominal) basis, the US economy will still dwarf India’s (even more so when measured on a per capita basis), on a price adjusted basis, India’s economy will be the second largest in the world, only following China’s, having grown tenfold in under a generation (25 years).

In this transformation, it is important for India’s leaders (and as the 2019 national Quote the demographicelection nears, for the electorate as well) to recognise that India’s governments are merely the custodians of growth and prosperity, not its creators, and that they need to get out of the way to let the story unfold, supporting the economy when needed, occasionally adding their support to one of the drivers, ensuring that the growth is balanced in its distribution without disincentivising risk taking and communicating its successes to the world at large.  In this role, India’s leadership can take pride in the fact that India is poised to exceed one of most amazing feats of development achieved by China, who took over 500m people out of poverty in just over 30 years.  India, which in the past decade alone has lifted over 270m people out of poverty, is well positioned to achieve more, faster, with the potential to end extreme poverty entirely by 2030, impacting a further 300m people.

What makes India’s growth even more impressive is that India has been, and will continue to be, pushing forward as a democracy that respects individual rights and with governments that are increasingly responsive to the needs of their citizens.  Long seen as an inhibitor to rapid transformation and development, India’s open society now appears to position it well for further growth, both now over the next decade.


India’s 2019 General Elections| India GDP Growth | Urbanisation| Demographic Dividend| Middle Class Consumption | Financial Inclusion | Industrial Policy

1. On a Purchasing Power Parity basis
2. Sources: World Bank, Future GDP growth based on PwC World in 2050 Report
3. For reference, China during the same period will add c.210m urban inhabitants.  Source: Indian Ministry of Housing and Urban Affairs, UN DESA, World Bank
4. Source: eMarketer, Internet and Mobile Association of India
5. Source: Businessworld, Kantar
6. Source: ibid
7. Source: World Economic Forum
8. Source: Goldman Sachs Research
9. Source: Government of India
10. See the February 2013 Sign of the Times: India Wide Open – Transforming India Now for 2040
11. See the August 2016 Sign of the Times: Restructuring the Nation’s Financial Sector for 10%+ Growth
12. See the February 2016 Sign of the Times: Realising India’s Demographic Dividend: The People Determine Success
13. See the October 2013 Sign of the Times: Transforming India’s Slums: A Critical Step in Creating the New India
14. Notes: 1) Infrastructure spend as a percentage of GDP assumed to increase from current levels of 33% to c.40%, in line with China’s current infrastructure spend levels; 2) Market capitalization as a percentage of GDP assumed to be in line with current levels of c.90% for India, which is already higher than average levels of middle-income countries (c.67%);