By Peter G Hall, Vice-President and Chief Economist
How the mighty have fallen. David’s lament for Saul and Jonathan is apt for the feted BRICS economies. Powerhouses of the last, long growth cycle, and resilient in the post- recession period, the BRICS have one by one lost their edge. Russia is sanctions-smothered. Brazil is infrastructure- incapacitated, among other issues. It’s all about commodities in South Africa. China is battling bubbles inflated by aggressive stimulus. And then there’s India. Sure, growth slowed here as it did everywhere else. But among these peers it finds itself alone, with growth reestablished and clearly ahead of the pack. What’s going on?
Let’s look at the numbers. Double-digit results were common in China in the past three decades; now, it seems a stretch to get to 7 per cent, and many are worried it could be worse. Brazil was never nearly that strong, but 4-5 per cent growth was thought achievable. However, 2015 was a U-turn year: a 4 per cent outright decline, and Brazil is not yet out of the woods. Russia is similar. Pummeled by sanctions and crashing oil prices, it has traded in 4-8 per cent growth for -3.7 per cent in 2015 and -2 per cent this year. Moreover, it has little to look forward to next year.
India found its feet in the final years of the last growth cycle. Long thought to have potential growth well above its performance, the sub-continent showed its stripes by climbing steadily from 7 per cent growth in 2003 to 10 per cent in 2007. Global recession hit India hard, but it rebounded smartly with a stimulus-fed 11 per cent burst in 2010. Growth dipped again, but in the past two years it has notched up increases of over 7 per cent per annum, and the near future is looking equally good. India’s growth rate is now in excess of China’s. Really.
How’s it happening? Well, it’s not a stimulus story. Chalk this up largely to a demographic dividend that’s boosting India’s vast consumer population. Add to this the oil dividend. On top of regular income growth, these consumers – and businesses in India – are benefiting greatly from low oil prices. In 2015 alone, the price plunge netted India an estimated $45 billion in savings that could be spent on other things. As oil is two-thirds of India’s import bill, the effect on the economy is huge. Add to this well-managed monetary policy, contained inflation, discipline in maintaining fiscal targets and a steady reform agenda, and the investment climate is looking quite attractive.
Current success underlines India’s well-known potential to support high growth long into the future. First, it possesses the largest army of underutilized labour in a world around them that’s fast running out of workers. This sets India apart from its BRICS counterparts and most other economies. Second, chronic under-investment in the past has actually created a capacity vacuum that, if steadily filled, would easily support strong growth. Third, growth can be further augmented by vastly increasing the efficiency of labour and capital through accelerating and deepening the adoption of newer technology.
The potential is there, but barriers have frequently impeded India’s progress. There is still hope that the Modi government will put India on a reform path that will reap enough gains to build a broad base of public support. It is hard to imagine momentum building significantly in the economy without a greater alignment on go-forward policy reforms at all levels of government. To succeed, India has a need to up its speed to the global pace.
India has a great advantage in today’s world economy, but there’s no room for smugness. There are other suitors: Indonesia also boasts a large, under-utilized workforce, and has been successful at drawing investment to its shores. Other Southeast Asian nations are likewise competing for foreign investment plays. And there’s Sub-Saharan Africa, also an untapped storehouse of potential, and increasingly aware of it. India still has an edge, but it will have to work harder in the future to maintain its current lead over competitors.
The bottom line? The future is looking bright for India, and long-run success for India also pays dividends to the rest of the world. Nothing breeds success like success, and so maintaining momentum is becoming paramount. India stands out as an economy that bears watching, and one that promises much to those who participate in its success.
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