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India: And miles to go!

May 17, 2006

India has come a long way from its inward-looking economic strategy practiced for around 50 years post the independence. Economic liberalisation and the gradual opening up to the world have boosted economic growth. It is being estimated that India will become the fastest growing economy by 2020, thus overtaking China. Moreover, its GDP per capita will double from roughly US$ 2,500 currently to almost US$ 5,000 by 2020. India is increasingly attracting the world's interest as a result of the country's impressive economic performance. In this write-up, we classify the factors that are leading the Indian economy in its way forward.Factors driving India's growth

Population and demographic trends: The population mix in India is changing for the better. Already, the country has a larger proportion of the population mix under the age of 15 as compared to major developed and developing countries. Assuming that the younger lot is able to find jobs (which is what a big challenge is), income levels in the country would improve, thus improving the overall standards of living for the populace. As per the National Council for Applied Economic Research (NCAER), the household mix is also changing. By FY07, the consuming class will form around 46% of the country's total households as compared to around 17% in FY95. The combination of both these fundamental factors, in itself, could lead to the emergence of a huge consumer base for the various products and services.

Rising integration into global trade and investment: India has made significant inroads into opening up its economy to the world outside. While the country's international trade volume as percentage of GDP pales in contrast with other major Asian countries and its import tariffs remain comparably high, we seem to be moving in the right direction. In order to gain further access to world trade, the government is expanding the trade agreements with many countries (like Singapore, Thailand, and other ASEAN members). The potential for FDI in India seems considerable.

Huge potential in infrastructure: World-class infrastructure plays an important role in creating a strong and sustainable growth path for an economy, more so for a developing one. In this regard, while India has been lagging its developing peers in terms of quality infrastructure, the realisation has finally set in. Over the past two years, the government has laid great emphasis on infrastructure development and it has been duly supported by private investments. The policy framework for the sector has changed favourably over time, including the lifting of FDI caps.

Growth across industries: Beside the IT sector, a huge growth potential is being noticed in the auto, pharmaceutical and Banking sectors. India's auto ancillary sector is rapidly getting integrated into the global industry. Outsourcing of production by large auto manufacturers to India is only expected to increase in the future. It is being expected that this sector shall grow between US$ 33 bn to US$ 40 bn by 2015. Similar is the case with the pharmaceutical and banking sectors, which are all contributing to the country's growth.

While these are some broad factors that have been aiding India's growth over the past few years, there exists solid support in the form of a strong institutional framework and a sound financial system. The country's growth potential over the next 10 to 15 years is going to set it at the forefront as compared to other developing and developed countries. India's favourable demographics, talent pool and the reforms process shall help India to a more advanced stage of development as we move forward. However, concerns like bureaucratic hurdles, corruption and low levels of human development still need to be addresses before we can call this century as 'India's century'.

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