>SPECIAL ECONOMIC ANALYSIS: India and China: New Tigers of Asia

India to Outpace China's Growth by 2013-1
Special Economic Analysis

In our second report comparing India and China in 2006 (India and China: New Tigers of Asia, Part II dated May 29, 2006), we made a call that India had the potential to catch up with China
in terms of GDP growth rates. That time has come, in our view.

We believe that, over the next two years, India should start matching China’s GDP growth of around 8.5-9.5%, barring another global financial crisis. More importantly, we think that,
by 2013-15, India will start outpacing China’s GDP growth notably. Morgan Stanley’s Chief Economist for China, Qing Wang, believes that China’s growth will move towards a more
sustainable rate of 8% by 2015, following the remarkable 10% average over the past 30 years. We believe India’s growth will accelerate to a sustainable 9-10% by 2013-15, after an
average of 7.3% over the past 10 years. In other words, over the next 10 years, we expect India’s growth to outpace China’s.

Indeed, we expect India’s per-capita income to reach China’s 2009 levels of US$3,750 over the next 10-11 years. We believe India will see further rise in investments to GDP, particularly
infrastructure, and China will see a gradual rise in consumption GDP.

15BIndia Is Transitioning to Higher Sustainable Growth Rates India’s GDP growth has moved from a range of 6% in the early 2000s to 8-8.5% currently. We believe this shift has been
premised on three key factors.

First, the improvement in demographics as measured by declining age-dependency (the ratio of the dependent population size to the working-age population size) has been the most important factor supporting this acceleration in growth. The ratio of the number of elderly people and children to the working-age (aged 15-64 years) population has declined from 68.6% in 1995 to 55.6% in 2010, according to United Nations (UN) estimates. In other words, the working-age
population has been growing faster than has the dependent population. This has helped support a structural rise in domestic savings.

Second, structural reforms have improved the utilization of the working-age population, a key resource. A positive demographic trend may be a necessary condition for strong growth, but it is not sufficient alone. Favorable demographics need to be converted into a virtuous cycle of acceleration in growth. A critical step in this process is the opening up of productive job opportunities through reforms. Over the years, India’s government has been initiating reforms to encourage private sector investment, which helps create the platform of employment for the working-age population. In this context, one of the long-standing challenges for India was acceleration in infrastructure spending. The government has finally been able to address this.

To read the full report: SPECIAL ECONOMIC ANALYSIS