Tuesday, November 25, 2014

PwC Report: India to be $10 trillion economy in 20 years; Too rosy picture?

Cover page of PwC report: Source: PwC site
A report published by PwC says India has the potential to achieve 9% growth rate and become a $10 trillion economy by 2034 (i.e., 5 times of $1.9 trillion in 2014) on the back of concerted efforts by the corporate sector and a constructive role played by the government. (http://www.pwc.in/en_in/in/assets/pdfs/future-of-india/future-of-india-the-winning-leap.pdf)

Here are the major expectations of the report:

  • Average life expectancy to increase to 80 years (from 66 years)
  • Manufacturing to be 25% of GDP (from 12%)
  • Agricultural output to rise to 7.4 tons/hectare (from 4 tons/hectare)

Overall, the report paints an optimistic picture though it considers several scenarios. It took a gap of few years for these optimistic reports to make come back. It is a feel good factor for all Indians and we can cheer at this renewed faith.

But one must not ignore the roadblocks and consider following factors to keep expectations more realistic.
  • In the next 20 years, there will be at least 3 elections. If the ruling party does not come back to power, replacing political party/parties have the habit of undoing some of the works done by the previous Govt. So forecasting the policies which will come into force in next two decades is grossly inaccurate task.
  • As the economy base increases, growth rates reduce. Many econometric models have shown this and one can look at the data of developed countries for the sake of proof. This would mean 9% growth would be achievable when India is a $2 trillion economy. By the time India becomes $5 trillion economy or so, growth rates will slow and even a 6-7% growth would look fantastic.
  •  In a period of 20 years, there would be couple of down years due to economic cycle taking a turn. Nobody has perfected the art or science of forecasting the downturns, the timing or impact of it. Central banks all over the world are still struggling to erase the impact 2008 financial crisis.
  • India has tough neighbors and had fought with two of them since independence. As growth kicks in, competition for natural resources and trade will intensify.
  • India is a low wage country at present. If wages rise quicker than broader economic growth, it would hurt exports and some of the competitive advantages. Though higher wages boost domestic consumption in the beginning, inflation will also go up limiting further growth in consumption.
  • Most of the investments are going into infrastructure space now but the productivity benefits derived out of better public infra is high in the beginning and tapers out over time. Further investments in infra after a decade or so may not produce the same financial returns like those earlier projects. So the investment opportunities in Infra will likely reduce over time as it is happening in Japan and Europe. Also think of ghost towns of China which has also built roads to nowhere.
Considering these speed-breakers in place, one can expect Indian economy to reach $7-8 trillion in next 20 years, if not $10 trillion and an average growth rate of around 7% (instead of 9%). Even if this is achieved, millions of people would move above the poverty line and India would be a front-runner in many fields.