beyondbrics

By Chetan Ahya of Morgan Stanley

India is catching up with China. Over the next two years, as long as we are spared another global financial crisis, India should start matching China’s economic growth of around 9 per cent. Then, by 2013-15, we think India will start outpacing China’s GDP growth notably.

We expect Chinese growth to slow marginally to a more sustainable rate of 8 per cent by 2013-15, following the remarkable 10 per cent average over the past 30 years. Meanwhile India’s growth will accelerate to a sustainable 9-10 per cent, after an average of 7.3 per cent over the past 10 years. What’s more, we expect India’s per capita income to reach China’s 2009 levels of $3,750 over the next 10-11 years. But what exactly will drive India’s growth rates higher?

It will be three things that we call the DRG factors: demographics, reforms and globalization.

First and most important is an improvement in demographics, as the ratio of the dependent population to the working-age population declines in India, raising the country’s overall human productivity. According to UN data, by 2020 India will contribute an additional 136m people to the global labour pool against just 23m from China.

Second, steady implementation of structural reforms is set to create more jobs for India’s growing number of educated and skilled young people, who are literate and hungry for development. Their demands are forcing politicians to initiate the reforms needed to generate employment.

The third factor enabling faster Indian growth is globalization, which is reflected in a steady rise in the value of its exports relative to GDP, and in the size of capital inflows relative to GDP. Both point to an acceleration in productivity.

These three factors combined will push India’s savings, investments and GDP growth higher.

In China, meanwhile, we expect a moderation in growth from its current high level as the government initiates a structural change to its economic model. It wants to reduce China’s dependence on external demand, increase the level of consumption relative to GDP, and narrow the current account surplus.

This rebalancing can be achieved primarily by lifting wages as a percentage of GDP and raising the prices of economic resources such as raw materials to reduce environmental costs.

A corollary of this trend, we believe, will be a transition of the country’s export model away from low-value-added manufacturing to higher-value-added manufacturing.

For global community, we think the story is not really about China or India; it should be China and India. But after a decade when China’s expansion has captivated the world’s attention, India is now going to pick up the baton of setting the pace for emerging markets.

Chetan Ahya is managing director and Asia Pacific economist at Morgan Stanley

Related reading:
11 for 2011: the big questions on emerging markets, beyondbrics