| Morgan Stanley The Roar Of The Tiger
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. India to Start Outpacing China From 2013-15 We believe that, by 2012, India and China will likely achieve similar growth rates of closer to 9% and from 2013-15 India will start outpacing China's GDP growth notably. The demographic trend is likely to diverge in the two countries. China is expected to reach an inflexion point in its age-dependency ratio around 2015. The UN estimates China's age-dependency ratio will rise from 39.1% in 2010 to 40% in 2015 and 45.8% in 2025 whereas India's will continue to improve from 55.6% in 2010 to demographic trends should improve further as age dependency declines. India will account for almost 26% of the increase in global working-age population over the next 10 years, according to UN estimates. The large surplus in India's working population is forcing recognition in the world economy of the country's role in global competition and output dynamics. As mentioned, UN data show that, by 2020, India will contribute an additional 136mn people to the global labor pool. In comparison, China and the US will contribute 23mn and 11mn respectively while Japan's and Europe's working populations are estimated to decline by 8mn and 21mn. Demographics alone are not sufficient for acceleration in GDP growth and it is important that the working population is educated. Over the past few years, the trend in education in India has improved significantly. We believe the quality mix of the fresh additions to the workforce over the next 10 years is likely to change dramatically. We estimate only 7-9% of India's population moving into the 15-plus age bracket is illiterate and that this could dip well below 5% over the next 2-3 years. Chinese Growth To Moderate
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. India 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
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
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. We expect infrastructure spending to rise to 8% of GDP in 2010 from 7.5% of GDP in 2009 and 5.4% of GDP in 2005. Similarly, business capex has been accelerating, except for during the recent period following the global credit crisis. The corporate sector has evolved from infancy to be ready to grow in an open global competitive environment. This rise in investment has indeed created the employment platform for the growing working age population. These reforms have played a critical role in boosting productivity growth. For an exhaustive list of reforms, please see Appendix 1. Third, globalization impact on the rise in savings rate. India's share in global services exports increased to 2.6% in 2009 from 1.1% in 2000. Also, we believe India has benefited significantly from a rise in capital inflows. A combination of structural reforms (including reduction in import tariffs and other protection), an increase in private corporate and infrastructure investments, and financial deepening, and changing corporate sector efficiency, has resulted in a steady increase in total factor productivity (TFP) growth. Our estimates indicate that India's TFP growth accelerated from an average of 2.4% in the 1990s to 4% in 2005-09. This interplay of demographics, reforms, and globalization is crucial for the virtuous cycle of faster growth in productive job creation – income growth – savings – investments – higher growth. Over the past 10 years, India's savings to GDP has risen from 24-25% to 33-36%. Similarly, investment to GDP has risen from 24-25% to 35-38% and GDP growth has accelerated to a trailing five-year average of 8.5% in 2009 from 5.9% in 2000. China has managed to convert its advantage of a growing working population into a virtuous loop of creating productive jobs for its expanding workforce and translate this to higher savings, investment, and growth since the early 1980s. China's age dependency peaked in 1965 at 80.4%. Since then, the country's working population has been rising sharply. Its age 2010. Concurrently, China's government has been able to increase productive employment opportunities and, in turn, generate higher savings. China's savings rate increased from about 25% in the mid-1960s to 35% in 1980, 37.5% in 1990, and 51.4% in 2009, supporting a major rise in investments to GDP. Real GDP growth in China has averaged 10% annually over the past 30 years, compared with 6.2% in India. During this period, China's GDP grew 16 times to US$5trn whereas India's rose seven times to US$1.2trn. China's exports (including services) surged 65 times over this period to US$1,330bn while India's exports increased 22 times to US$250bn. The lag in India's performance, in our view, was due to the lower level of support from demographic, reform, and globalization factors. India's demographic cycle is trailing China's. Although the two had similar age-dependency ratios in the late 1970s, China has far outpaced India in the past 20 years. China was also well ahead of India in initiating structural reforms, introducing them in the late 1970s versus in the 1990s in India. One could argue that the pressure on policy makers to create jobs emerged earlier in China because of the way the change in the working-age population progressed there. India was also late in deciding to participate in globalization, as reflected in the import tariff trend. India's integration with the global economy started to accelerate in the early 1990s while China's integration began in the early 1980s. For example, India had import tariffs above 30% until the early 1990s. Indeed, we believe India is following the same path as China when we compare their export to-GDP ratios, keeping the starting points for both as the years in which the countries initiated the liberalization that allowed their resources to interact with those of the rest of the world. However, India's GDP growth is now inching closer to China's. Over the past three years, India has been narrowing the gap with China in terms of GDP growth. In 2010, we estimate India's GDP growth at 8.5% and China's at 10%. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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