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Indian GDP growth - 'bubble-proof'?

Dec 3, 2009

Many readers would want to disagree with this argument. Many would want to reason why asset bubbles can not only reduce but also derail a healthy economy's growth prospects. But if statistics are even remotely indicative, India's case could be an exception. A recent speech by an RBI deputy governor let us into some very interesting insights in this direction. Allow us to explain ourselves.

The age structure of a population affects a nation's key social and economic issues. Asian Development Bank estimates India's working age group to top most others globally in the next 2 decades. This would comprise those between 15 to 64 years of age. The working population is expected to increase steadily from 63% in 2006 to 68% in 2026. This much-talked about demographic virtue ofcourse does not stand on its own. It would certainly lean upon good healthcare, education and social wellbeing of the growing population.

The RBI team has done a statistical analysis of India's GDP, housing loan and educational loan for the past 5 years. The study suggested that for every 1% increase in GDP growth, there is 3% growth in housing loan. It is accompanied by 5% growth in education loan. Now, let us assume a real GDP growth rate of 6.5% in FY10. The same is estimated at 7% in FY11 - 12. And again by 7.5% over the next two fiscals. At this rate, the housing loan is expected to grow at an average of 25% over the next 5 years. A similar trend can be drawn on education loans. That shows a possibility of 38% average growth in educations loans over the next 5 years. These trends, however, have little association with whether or not the Sensex, Gold and commercial real estate prices touch their all time highs. More 'working' Indians will still need to buy houses and get themselves better educated. Higher and productive use of capital will in turn help in building a more resilient economy.

Another argument is that India's per capita income is expected to quadruple by 2020. At the same time, the Indian middle class is expected to expand by more than 10 times from its current size of 50 m to 583 m people in next 18 years. The swelling middle class and rapid urbanization is estimated to elicit requirement of additional 45 m housing units in the next 3 years alone.

Further, in the recent years, a virtuous cycle of growth, saving and investment has been in operation. The same is only set to improve with a decline in dependency ratio. For the uninitiated, dependency ratio is that of non-working to working population. A study by Goldman Sachs suggests that India has 1:1 relationship between the dependency ratio and national savings. For every 1% decrease in the dependency ratio, the national saving to GDP ratio grows by 0.8%. India's dependency ratio is expected to fall from 37% in 2006 to 32% in 2026. This in turn is expected to propel the country's savings to GDP ratio. The same could rise from the current 37% to 41% in the next one and half decade. These factors will facilitate both rise in saving and capital formation. Needless to say this trend will further reinforce the virtuous cycle of growth in future.

Thus, readers can continue to seek more information about which asset classes in which geographies are set to lead the bubble-bursting pattern. Meanwhile, India's fundamental fortitude could lend them some comfort.

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