Favourable labour market could see India rival China as world’s largest economy

India is on track to rival China as the largest economy in the world in 2075 in real terms - if it can overcome some key hurdles.

China’s economic ascension is slowing down because its economically active population is peaking. To an extent, China’s growth model has 'crowded out' the growth of other industrialising nations in Asia, making it more difficult for those countries to attract foreign direct investment and production platforms to help fuel their future growth. However, as China rebalances away from production and towards consumption, the production heavy stage of China’s growth model should peak between 2040 and 2050. This means younger Asian economies will have greater space and capacity to industrialise, and take up a similar growth pattern to China’s between 1990 and 2050.

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India has a large labour endowment and huge potential gains in productivity to be made.  It will overtake China in terms of population by 2020 and in terms of economically active population in 2040. Unlike China, India’s economically active population will not peak over the forecast period. Indeed, India has a demographic endowment that will significantly exceed China’s and therefore has enormous potential to industrialise as the world’s manufacturing base and services hub given this huge demographic dividend.

Through to 2060, we expect India will achieve around a 2.8 per cent increase in GDP through productivity gains, compared with just 1.3 per cent in China or 1.9 per cent in Brazil.

Trade will play a large role in India’s growth as well. India’s share in global exports is expected to make steady progress over the next 50 years. India’s exports will increase from 2 per cent in 2012 to 3 per cent in 2030, with a substantial increase in share to 7 per cent between 2012 and 2060. This follows the relative decline of China’s exports from 2030 to 2060, from 19 per cent to just 15.

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Emerging Asia in general will have a significant role to play in global manufacturing. While currently accounting for 29 per cent of manufacturing, it will account for 43 per cent in 2060. However, its contribution to energy will decline from 37 per cent to 29 per cent while the USA and Canada’s share is forecast to increase. Emerging Asia will also capitalise on a burgeoning services sector, contributing an additional 15 percentage points of global services production in 2060.

Despite its recent position at the Bali negotiations on global trade, India can only gain from further trade liberalisation as well, regionally and multilaterally. Indeed, China’s clear superior trade performance over the past two decades has been due to a faster liberalisation of domestic trade barriers.  We believe India has enormous future dividends to be realised from both multilateral and regional trade liberalisation. India’s trade is likely to be 25 per cent higher by the middle of the Asian Century in the event of multilateral trade liberalisation. However, recent steps backwards in the Doha round of negotiations do not suggest these gains are reasonably foreseeable at this stage.

This is an excerpt from a presentation by Glenn Maguire, ANZ Chief Economist, South Asia, ASEAN and Pacific, in Delhi, on 5 August 2014.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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