India 2020 Economy Outlook

  
   
Preface|Foreword|Executive Summary|India's Macro-economic Outlook 2020|Growth Drivers| State wise Analysis |Moving Ahead on the reform|Some Concerns to Growth|Launch Event|
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India’s macro-economic outlook 2020

Over the years, the Indian economy has gone through phases of remarkable transformation. After witnessing the Hindu rate of growth for the first three decades post-independence, the Indian economy got its first “big push” with the first phase of economic reforms in 1980s. The economy recorded annual average growth of around 5.6% during this decade, with significant decline in population below the poverty line from more than 50% in late 1970s to below 40% in late 1980s. The second major push came post 1991, following liberalisation of the economy, which helped it to move on to a sustainable higher growth trajectory. India’s growth performance was even more impressive in the subsequent decade, with per capita income (at constant prices) rising to र38,408 in FY10, versus र16,065 in FY91. Although India has made significant economic progress as the result of reforms over the years, it still has a long distance to go before it is able to make abject poverty a history.

India has been increasingly looked at as an engine that will drive global growth in future. This is reason enough to look at the economic prospects of India over the current decade. Our forecasts indicate that the likelihood of India sustaining 9.0% growth during the current decade is very high. According to D&B’s estimate, in the journey during the current decade as India traverses a high growth path, it would eventually surpass Japan’s GDP level (as in 2010 at current US$) by FY20. The concomitant rise in income levels coupled with increasing young working-age population will work towards increasing the share of discretionary spending in private final consumption expenditure and raising the savings rate. Growth of urban population will be one of the most important demographic shifts that we will witness during the current decade.

Infrastructure will be both a cause and a consequence of economic growth during the current decade. The rising incomes and urbanisation will boost demand for infrastructure investment in sectors such as electricity, roads, telecom et al. Massive infrastructure investment by the Government along with increased investment activity by the private sector will accelerate overall investment during the current decade. Government of India’s (GoI’s) thrust on infrastructure development in recent years and the structural policy changes is expected to provide the third “big push” to the Indian economy, enabling it to achieve inclusive growth during the current decade (Current decade refers to FY11-FY20).

The current decade will be rich with profound changes, that will present us with both challenges and opportunities. Our forecasts for the current decade can help us to prepare for future challenges and seize opportunities. Economic growth during the current decade will bring with it challenges in terms of meeting rising energy needs in ways that are cost-efficient, sustainable and environmentally compatible. Pressures on natural resources will exacerbate during the current decade. Increased demand and environmental concerns will make innovation imperative. The solution will need to lie in technology that meets rising energy demand that are cost-efficient, sustainable and environmentally compatible and reduces reliance on natural resources.

India to become US$ 5 trillion (current market price) economy by 2020

India’s Real GDP is expected to register an average growth of around 9.2% during FY11-FY20, on the back of robust private consumption demand, increased infrastructure spending, substantial growth in investment activity and strong growth in services sector.

Strong GDP growth is expected to result in considerable increase in real per capita income, which in turn would lead to significant reduction in the percentage of people living below the poverty line. With rising income levels, India is expected to move from a low-income country to a middle-income or upper-middle income country by 2020.

India’s growth to be driven by a rapidly expanding services sector

Despite reduction in net sown area due to growing urbanisation and industrialisation, the agriculture sector is expected to record an average growth of 4.3% (the growth forecast for agriculture sector is underscored by an assumption of normal monsoon)during FY11-FY20 owing to increase in investment in agricultural infrastructure such as irrigation facilities, warehousing and cold storage.

We expect the industrial component of GDP to grow at an average of 9.5% during FY11-FY20, backed by robust private consumption demand, increase in India’s exports, growth in domestic investments and government’s thrust on infrastructure development. Among industries, sectors such as ‘basic, metal & alloy industries’, ‘metal products & parts’ and ‘machinery & equipment’ other than transport equipment are likely to see sustained growth during the current decade owing to strong investment demand and increased expenditure on infrastructure development. Moreover, rising income levels and increasing of the middle class working-age population are expected to result in higher demand for consumer durables.

According to D&B’s estimates, substantial growth is expected in the services component of GDP during the current decade. Growth in services sector is expected to average at 10.1% during FY11-FY20, largely driven by robust growth in hotels, transport, communication and financial services.

The analysis of sectoral GDP data reveals the pattern generally exhibited by economies in the phase of rapid growth. Despite around 4% growth in the agriculture sector, its share in aggregate GDP is expected to decline further from 14.6% in FY10 to 9.2% in FY20. This can largely be attributed to increased traction in services. While the share of services sector is expected to surge from 57.3% in FY10 to 62.0% in FY20, the industrial sector’s share in aggregate GDP is expected to increase marginally from 28.1% in FY10 to 28.8% in FY20.

Strong growth in domestic savings to support domestic investment

The government’s thrust on infrastructure development along with increased investment activity by the private sector is expected to accelerate the overall investment during the current decade. As per D&B’s expectations investment as measured by Gross Domestic Capital Formation (GDCF) is expected to increase to 41.3% of GDP during FY20 from 36.5% in FY10.

A major proportion of investment would be funded by domestic savings, which means lower recourse to external finance. As per D&B’s forecasts, aggregate savings as a percentage of GDP is expected to surge to 38.8% in FY20, as against 33.7% in FY10; domestic savings would primarily be driven by rising income levels. Moreover, a growing middle class population and changing age composition of the country3 are expected to help raise saving rates.

Share of discretionary spending expected to rise

Rising income levels coupled with increasing young working-age population will lead to significant growth in private final consumption expenditure. As per D&B’s projections, growth in private final consumption expenditure is expected to average at around 9.1% during FY11-FY20.

Although consumption will continue to be the major contributor to GDP during the current decade, its share is expected to decline gradually. The share of private final consumption expenditure in total GDP (at constant market prices) is expected to decline to 57.6% in FY20 from 58.5% in FY10. This will be primarily due to significant increase in domestic investment activity.

Further, the analysis of consumption expenditure data reveals a changing pattern of private final consumption expenditure during the current decade. The share of spending in basic goods (food, beverages & tobacco and clothing & foot wear) in private final consumption expenditure is expected to decline substantially to 28.0% in FY20, versus 40.3% in FY10. On the other hand, share of discretionary spending (rent, fuel & power, furniture, medical care, transport & communication, recreation & education) is projected to increase considerably.

Rising proportion of working-age population

The total population of India is projected to rise to 1.3 bn (according to Population projection for India and states 2001 - 2026; Report of the Technical group of Population; Projections constituted by the National Commission on Population May 2006)in 2020 from 1.2 bn in 2011, as per Census of India estimates. The crude birth rate is projected to decline to 18.0 during 2016-20, as against 21.3 in 2006-10, due to falling levels of total fertility. On the other hand, the crude death rate is expected to decline marginally to 7.1 during 2016-20, compared with 7.3 during 2006-10, owing to increase in expectation of life at birth and increased access to medical care.

Further, with declining fertility, the proportion of population aged less than 15 years is projected to decline from 35.4% in 2001 to 25.1% in 2021. The proportion of the middle (15-59 years) and older age (60+) population, on the other hand, is expected to increase substantially by 2020. In fact, the proportion of population in the working age group (15-59 years) is expected to rise from 57.7% in 2001 to 64.2% in 2021. Substantial rise in the workingage population or a reduction in dependency ratio augurs well for growth momentum of the Indian economy going forward, as it will result in ample supply of labour for productive purposes and in turn lead to rising income levels.

Further, with rapid industrialisation and development of Tier II and Tier III cities, the urban population in the country, which was 28.0% in 2001, is expected to increase to 32.1% in 2020.