INDIA: TWENTY TWENTY FIVE (UBS)

We believe India is about to resume an extended period of high economic growth. This article summarises the determinant factors over a 10-15yr timeframe, then illustrates what this implies for investment and consumer spending. Just two factors tell us India could be waking up to an extended period of high trend growth, we believe, of 8-9%pa: high savings and rising industrialisation. Government intervention matters, but ultimately more intervention just reduces economic efficiency and thereby the step-up in real growth. The basic question is: will real growth centre around 10% pa or sink nearer 5%? The difference between these two boundary rates is the difference between doubling or more than trebling of per capita GDP over a 10-15yr timeframe. As per capita GDP rises from c.$3k today, within the next 1-2years the intensity of spending on investment goods, materials & energy rises almost vertically; then on approach to $10k per head ten years hence consumption spending follows suit. Successive industrialising nations reach these points earlier and India’s no exception. Finally, on structure, whether India continues to run current account deficits or swings to surplus ought not to matter for growth per se. But a deficit path makes growth more volatile because it is vulnerable to: (i) twin external shocks (trade & capital) and (ii) the 'grow-inflate-devalue' pattern due to overemphasis on pro-growth demand stimulation.


Miracles explained

Common factors
What are the common factors that drive a sustainable step-up in economic growth rate? The main one turns out to be the savings rate (or economic surpluses) (Chart 1). What helps generate this at a very basic level is things like: technology and the cost and availability of labour; demographics. But irrespective of whether economic surpluses come from agriculture, services or manufacturing they also need to be retained. Here, secondary factors like inflation play a role. For some economies in their high-growth phase they attain a ‘low’ (0-5%) long term inflation rate; for others inflation’s closer to 10% or even higher. Long run inflation rate matters because, if relatively high, it pushes savings overseas and keeps local cost of capital higher than that abroad. This typically corresponds to a savings-investment gap (current a/c deficit) funded by overseas borrowing (Chart 2). Unsurprisingly economies with higher inflation and persistent current a/c deficits have ingrained expectations of currency depreciation.

Another common factor is export and trade share of GDP. In East Asia a very common pattern is export-led industrialisation. Exporting manufactured goods to the rest of the world is a common contributory factor to rapid economic growth. This requires (i) relatively open global markets - ie access to new export markets and technologies, (ii) an abundant and therefore relatively cheap pool of labour (shown by falling dependency ratios) and; (iii) heavy investment in export industries. Mature Asian economies have already passed this phase and we can track their paths in Charts 3-6. The question is: is India in this picture and can we look forward to a similar pattern over the next 10-15 years.

To see full report: INDIA 2025