Saturday, March 27, 2010

Next 10 years could see the Indian economy growing by four times

India has come a long way since the economic reforms in 1991, moving from rates of 5% into the orbit of 7-9% growth rates. However, how many of
us really know the scope and scale of this story and how it pans out over the next 10 years? At Edelweiss, we tried to estimate this growth, and the numbers are staggering.

We have assumed Indian gross-domestic savings at around 35%, an incremental capital output ratio of four as in the past decade, inflation of 4% and a marginal current account deficit of 2%. These assumptions lead us to a real GDP growth rate of 9% and a nominal growth of 13%.

By 2020, India’s GDP is likely to quadruple from the current $1.1 trillion to about $4.5 trillion. Per capita income is likely to triple from the current approximately Rs 50,000 to over Rs 1.5 lakh. The number of households with income of more than Rs 16 lakh will be over 18 million, while the number of middle class households (income between Rs 1.5 lakh and Rs 16 lakh) would grow by 50% to 180 million.

Number of deprived households (with income below Rs 1.5 lakh) is likely to be reduced by almost 25% to 100 million. Indian consumption is likely to increase 3.7 times to about Rs 113 trillion, with discretionary expenditure likely to increase significantly. According to our estimates, the education sector will grow 5.7 times, domestic pharma and healthcare six times, media and entertainment five times and organised retail 6.3 times. The automobile sector is likely to grow 4.8 times, while urban premium housing will grow 6.5 times.

By 2020, we expect total savings to be about $1.4 trillion — more than our current GDP. The massive growth in savings will propel a 5.3 times growth in banking, 4.7 times in broking, 5.7 times in asset management and 4.7 times in life insurance. There are three key risks to achieving and managing this growth. Execution of planned infrastructure projects remains an area of concern, inflation is another. The third risk to growth is the inclusion of lower income segments. With a Gini index of 36, the income disparity levels in India are amongst the highest in the world. It’s important that the bottom of the pyramid participates in the growth process.

However, in the past decade, we have grown at 7.2% with 5% inflation and carried out significant reforms despite pulls and pressures of a democracy. We see no reason why this can’t continue for the next 10 years. In fact, I am personally confident that our projections may well prove to be underestimates.

(The author is president at Edelweiss Capital)

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