9 February 2016

Can India Save the World Economy?

So far, the economic developments and results to emerge in the first seven weeks of 2016 have been, for the most part, very disappointing and are leading to a growing pessimism surrounding the near-term future of the global economy.  For example, the initial GDP growth estimates for the fourth quarter of 2015 for the world’s two largest economies, the United States and China, were both disappointing and there is little hope for better results from the world’s other leading economies.  Moreover, falling oil prices and the slowdown in China have added to the already considerable downward pressures on share prices around the world, resulting in the loss of significant wealth around the world over the past seven weeks.  Overall, the global economy has stagnated in recent years and the prospects for a return to pre-crisis growth levels are remote at best.  Amid all of this bad news, one large economy has produced results that are providing a glimmer of hope for higher growth rates in the coming year, India.

While Indian economic growth slowed to 7.3% on a year-on-year basis in the fourth quarter of 2015 (a fall from the 7.7% growth recorded in the previous quarter), India’s overall growth rate of 7.5% for 2015 was a solid performance and the highest rate of growth in India since 2010.  Moreover, this represented the first time that the Indian economy grew faster than the Chinese economy in more than two decades and forecasts call for India’s growth lead over China to increase in the years ahead as the Chinese economic rebalancing leads to lower growth rates in the world’s most-populous country.  Over the past five years, the Indian economy has grown by an average of 6.7%, with growth rates trending upwards over the past four years.  Over the next five years, the Indian economy is forecast to grow by an average of 7.6% per year, highlighting the fact that India’s recent strong performance was not a fluke.  This will make India the world’s fastest-growing large emerging market, leading to an increasing number of exporters and investors looking to India as a key driver of their growth in an increasingly troubled global market.

While India is positioned to remain the world’s fastest-growing large emerging market, its ability to act as a leading driver of global economic, trade and investment growth remains rather limited.  This is due to the fact that India’s total GDP at present is just $2.2 billion, just 12% of that of the United States or 19% of that of China.  In fact, India’s total economic output remains smaller than that of Britain or France (and just above that of Italy), and nobody is looking to those countries to drive global economic growth in the 21st century.  Furthermore, India’s total imports are just $463 billion, far less than those of the US or China and even smaller than those of South Korea, Canada or Italy.  In terms of foreign investment, India also lags far behind the world’s two leading economies and FDI inflows into India have not grown at all in recent years.  Altogether, even with the Indian economy poised to grow at a healthy pace in the coming years, its contribution to global economic, trade and investment growth will remain very limited over the remainder of this decade.

While this lack of relative scale limits India’s ability to significantly boost the prospects for the global economy over the near-term, there are still reasons for optimism for longer-term growth in India.  For example, the government of Prime Minister Narendra Modi is promoting reforms aimed at attracting more foreign investment to India, particularly in those sectors of the economy that can boost longer-term growth prospects.  These include India’s manufacturing sector, which needs to be expanded to further increase India’s economic growth potential, and the country’s woeful infrastructure, which must be improved if India’s manufacturing sector is to grow.  Meanwhile, India’s rapidly expanding population will soon overtake that of China and this will lead to significant growth rates for consumer spending in India.  While India’s contribution to total economic growth over the next five years will remain limited (less than 5% of global economic growth will be produced by India between 2016 and 2020), India will slowly begin to play a larger role in driving global economic growth in the 2020s and beyond, and will emerge as a third pillar of global economic growth next to China and the United States over the long-term.  As those who do business in India know, patience will be the key to long-term success in that giant emerging market, but this patience will be tested by the near-term problems facing the global economy.