India's GDP to Grow at
9.6 pc in Next Decade

A broad-based economic study conducted by Indicus Analytics and presented by New Media has projected an annual growth rate of 9.6 percent GDP for the decade 2010-2020. This economic assessment study looks at how various economic and demographic parameters are evolving. It predicts conditions in India by 2020 if these trends continue to move in the 2010s the same manner as they have been over the 2000s. This is not a general equilibrium analysis and takes a sector by sector and area by area approach. However, without making any strong assumptions about the future, both Indicus Analytics and New Media are fairly confident that conditions by 2020 will not be very different from that revealed in the study.


The trends of the 2000s will continue but growth will be much faster Agriculture investment will finally resume after many decades of relative sparseness, but this sector could well grow much faster than the expected 3.4% - a rural road network has been built up, high agri commodity prices would improve terms of trade towards this sector, rural human capital has improved tremendously in the 2000s, new technologies are about to enter on a mass scale, agri reforms such as the APMC acts are being overhauled. However, we would need to wait till the 2020s for the full impact of these changes to be felt for the time being agriculture (including forestry and fishing) would barely sustain its 3.4% growth. Manufacturing opportunities would improve on account of rapidly growing domestic market as well as international markets however, energy and wage price inflation will play a role. The labour problem has not been solved yet, and expect a resurgence in labour unrest in 2010s. Transport, storage and communications will be the driving force of growth in the country in the 2010s. A large road network is going to be operational, ports are rapidly improving, air transport infrastructure is being overhauled, and most important, a strong ecosystem has been created for the telecom sector.

Overall GDP growth will be around 9.6% annually, even if the government does not do anything. It would be higher if agriculture and electricity, gas and water supply are able to break through their long term institutional constraints. It would be lower if inflation eats into macro-economic stability and law and order conditions get out of hand.

Agriculture
Agriculture will become a far smaller part of the economy, and will finally account for less than 10% of the Indian economy. Together agriculture, mining and manufacturing would account for barely 25% of the GDP services which would be three fourths of the Indian economy. The utilities (electricity, gas and water supply) will grow but not that much; the momentum has just not been generated yet. Some electricity projects will go on stream, some gas pipelines will get extended, and some water related projects will be instituted - but this growing economy will become thirstier for energy and water. This will continue to constrain manufacturing growth. But a combination of investment in the 2000s, reforms, technology improvements, and an institutional structure have been put up in the 2000s for the transport and communication sectors. This sector will drive the Indian economy in the 2010s. Even without any further reforms, the stage is set, the tipping point reached.


Per Capita Income Growth
Higher economic growth at about 9.6% will lead to a per capita income growth of close to 8.0% per annum that is households will earn about double that they do now by 2019-20. This extra income will also reflect in a changed household budget. Household expenditures will grow by more than 8.0% per annum in the next decade. The overall household budget would be about two times higher than now in real terms. The share of food and related products would fall from 40% now to 34 % in 2019-20 (though in absolute amounts it would be about 1.8 times higher). Transport, education, health and recreation would all be among the most rapidly growing items of consumer expenditures. Depending upon how international energy prices evolve (it is likely that energy would be among the major subsidy items in the coming decade), the overall budget share may actually fall not in real terms though.

The term miscellaneous goods and services includes a range of items ranging from durables to FMCG to household help, as incomes grow, these items would be among the fastest to rise reflecting the evolution of aspirations of ensuring basic consumption to enjoying better lifestyles. The tipping point is not so much in health or education in the aggregate, but in goods and services that promise better lifestyles.

What will Indians eat in 10 years? Despite the current high inflation in food products, the trends are quite unambiguous. Indians will spend more on food, but not that much more in real terms. As governments are likely to ensure long term food inflation is kept under check through various mechanisms, the food component will fall in household budgets. But lifestyle changes will show up in a major way in our eating habits. That is the next tipping point, cooking at home will continue, and we will not do away with kitchens as in Thailand but processed foods and eating out will emerge as the among the most rapidly growing component of household budgets.

Already, not just the middle class and the affluent, but the poor as well are eating out. Nuclear families, greater demand for entertainment, women's education and expected rise in their entering the job market all are long term trends that will combine and create a demand. And the supply response will not be far behind.

Healthcare
Healthcare expenditures will grow rapidly, and so will those for education. But it will be recreation and communication that will drive household expenditures the most. The Indian household will move more and more towards lifestyle enhancing expenditures. This same theme will get reflected in all forms of the budget. Within education and health care however, expenditures would rise dramatically at the tertiary level the government would have more or less withdrawn as an important player servicing the masses in vocational and even higher education as well as hospitals. A few islands in the form of IITs and IIMs will remain and some more may also be created. A few more district hospitals may be set up, and all these are expected to be priced much lower than what the market would dictate. But these will not be able to service a large share of the demand. That growth in demand for health and education will be serviced by the private sector and another tipping point will be reached in terms of the expenditures on tertiary education and health.

A surge in durable ownership by households is one of the most unambiguous trends. Large numbers of both rural and urban households will benefit from access to electricity as well as financing to purchase and operate electric appliances. The only threat to this scenario - Electricity Supply.

The Copenhagen talks notwithstanding India will need more and more energy to service the demands of a growing economy. However, India will not become an energy intensive economic power in the coming decade. India's GDP in 2019-20 would be about 4.5 times what it was in 2001, however, total energy requirement would have barely doubled since then. Why? First endemic lack of energy has created an economy that is not as energy dependent as (say) China. India's growth relies more on services that are typically less energy intensive than manufacturing. Moreover, we should expect lesser energy intensity in the emerging economy of tomorrow as was required in the past.

The demand for wheat will surpass that for rice on account of increased incomes and changing preferences, not to mention higher population growth in the northern part of the country. But this will not be at the cost of coarse grains. Consumption of meats will stagnate and may even fall on account of higher relative prices. The consumption of cash crops will continue to rise and the demand for milk, and fish is likely to grow rapidly. Overall agriculture will steadily but slowly move towards being more of a cash crop sector. That is subsistence in agriculture is likely to become less and less important.


Poverty Level
Currently almost 300 million people are expected to be living under extreme poverty as defined by the Planning Commission. And this figure has been more or less stagnant over the last four decades. It is well known that the rate at which poverty rates are falling is reducing in other words, if the current trends continue as many as 260 million persons would remain under extreme poverty even by the end of the decade. Rapid reforms can however dramatically reduce these numbers these reforms would generally be oriented towards ensuring that the demands of a growing economy are well met by appropriate skills and human capital. However, creating human capital takes a long time, especially among those who are the least privileged. Hence even in very good scenarios almost 200 million persons are likely to remain extremely poor by the end of the decade. Consequently expect that social safety nets would remain critical for India.

Depending upon whether youth would like to study more or work earlier, to what extant women enter the workforce in larger numbers, and what income earning options exist between 126 to 255 million additional Indians will enter the workforce in the period under consideration.

Urbanization
About 32% of India's 1176.7 million people reside in Indian cities currently. This will increase to about 35.4% of the total population of 1326.2 million by 2019 an addition of about 100 million. The bulk of this new urban population will comprise of recent migrants.
The 244 million households would have increased to about 288 million cross rural and urban India. India will progressively become less poor but by no means be able to eliminate the ranks of the extremely poor. Those households earning less than 75,000 per annum will fall from 23 million to less than 12 million in urban India and from 96.7 million currently to less than 77 million in rural areas. At the same time the number of households that can be classified as highly affluent (> 10 lakh per year) will rise from 4 million currently to 12.5 million in urban areas; and from barely 1.5 million to 3.6 million in rural areas. But the greatest increase is going to be among the middle classes. The great Indian middle class will finally become a reality in both rural and urban India.