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A HUNDRED years is a long time in the life of a nation. In 1940, India was a poor country under foreign yoke. By the year 2040, if things go according to prediction, India will be the third largest economy in the world with a reasonably high per capita income. This is as per the recent Goldman Sachs study titled `Dreaming with BRICs: The Path to 2050' authored by Dominic Wilson and Roopa Purushothaman. The report places Brazil, Russia, India and China (identified as BRIC countries) among the fastest growing economies over the next 50 years. So how is this prediction earthshaking? The World Bank publishes estimates of gross national income (GNI) in terms of nominal as well as purchasing power parity (PPP) of various economies. According to the World Bank, India had a nominal GNI of $477 billion and a PPP GNI of $2,913 billion in 2001. This yielded a per capita GNI of $460 in nominal terms and $2,820 in PPP terms. In PPP terms, India was already the fourth largest economy in 2001 after the U.S., China and Japan. As Japan had a GNI of $3,246 billion in PPP terms that year, it is expected that India will soon overtake it to become the third largest economy in PPP terms. However, India's per capita income continues to be abysmally low, both in nominal and PPP terms. The difference between the predictions of the investment bank's study and current PPP estimates of the World Bank is that according to the Goldman Sachs study, the Indian economy could be larger than that of Japan by 2032 in terms of nominal U.S. dollar. The study predicts that the size of the BRIC economies could exceed that of the G-6 countries, consisting of the U.S., Japan, Italy, France, Germany and the U.K., by 2039. Of the G-6 countries, only the U.S. and Japan may remain among the six largest in U.S. dollar terms by 2050. China could be the largest economy by 2041. Table I provides US$ GDP projections while Table II provides per capita US$ projections of the BRIC countries as well as that of the U.S., Japan and Germany.
Basis of prediction
The study assumes that the rise in GDP in US$ terms of the BRIC countries will come from a mix of rise in real GDP and currency appreciation. The Goldman Sachs study basically uses a growth model in terms of labour, capital stock and the level of `technical progress' or `total factor productivity' to arrive at growth projections. Further, the model of real exchange rates is calculated from the predictions of labour productivity growth. This is because currencies tend to rise as higher productivity leads economies to converge on PPP exchange rates. The BRIC economies at present are way below their PPP rates. It is true that a pegged exchange rate (for example, the Chinese yuan peg against the dollar) may distort the picture. In practice, the study presumes that real exchange rate appreciation may come from a combination of nominal appreciation and higher inflation. About two thirds of the increase in US$ GDP terms will come from higher real growth with the balance through currency appreciation. The BRIC's real exchange rates could appreciate by up to 300 per cent over the next 50 years, or at an average 2.5 per cent a year. India's exchange rate is assumed to appreciate by 281 per cent during this period. The present economic powers are mainly the U.S., the European Union countries and Japan. Given the size of the population of the BRIC countries, their long-term economic success would also have a major impact on the power equations in the world.
Changing demography
According to the study, India has the potential to grow the fastest among the four BRIC countries over the next 30 to 50 years — higher than 5 per cent over the next 30 years and close to 5 per cent as late as 2050. A major reason for this is that the decline in working age population will happen later for India and Brazil than for Russia and China. For example, it is predicted that in 2010, India will have a high 53.9 per cent of its population in the age group of 15-59 years. The predictions are not unreasonable. As the report points out, South Korea's GDP increased by nine times between 1970 and 2000; these projections are tame by comparison. In fact, except for Brazil, the other three economies are already achieving this kind of growth rates. A basic assumption of the study is that the BRIC countries maintain policies and develop institutions that are supportive of growth. These include sound macro-economic policies and a stable macro-economic background (low inflation, supportive government policies, sound public finance and a well managed exchange rate), stable political institutions, openness and high levels of education. The BRIC report is timely, especially in the Indian context. Recently, India witnessed its foreign exchange reserves crossing US$ 100 billion. However, this is not an unalloyed blessing as there has been considerable upward pressure on the rupee. This year India will probably achieve a GDP growth rate of around 7 per cent, mainly on the back of a rise in agricultural output on account of bountiful rains. However, if the country is aiming for a growth rate of around 7 per cent per annum over the next decade, then it will need an investment rate of about 28 per cent given an Incremental Capital Output Ratio (ICOR) of 4. To achieve an investment rate of 28 per cent, the country will have to increase its domestic savings rate to around 25-26 per cent and meet the balance from a current account deficit. By running up a current account surplus and building excessive reserves will not increase GDP growth rates. For higher growth, policies that result in foreign exchange inward remittances in various forms being invested in the Indian economy will have to be introduced. Given the low per capita incomes and widespread poverty, the `India Shining' campaign seems rather premature.
Historical opportunity
Given the comparative advantage of a skilled workforce available at low costs, backed by huge foreign exchange reserves and foodgrain surplus, India has a historical opportunity to fulfil the BRIC report predictions. However, many things can go wrong even with reasonable projections, especially over a long time horizon. In the case of India, both the government and the private sector need to increase investments in education. Fiscal deficit also needs to be brought down with a mix of expenditure control and better tax compliance. India cannot be complacent on the economic reforms front. Even with the kind of prediction provided by the report, India's per capita income will continue to be the lowest among the four BRIC countries, and far lower than those of the developed nations. One interesting aspect of the predictions is that by 2030, the largest economies of the world may not be the richest, in terms of per capita income.
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