India could grow at 8% in FY16-20: Goldman Sachs3 min read . Updated: 15 Sep 2015, 12:09 AM IST
Access to banking, technology adoption, urbanization and structural reforms to power GDP growth, says report
Rising productivity could help India grow at a potential 8% on average during from fiscal 2016 to 2020, compared to 7% during fiscal 2012-15, under the new GDP series, investment bank Goldman Sachs said in a report on Monday.
Growth will be powered by greater access to banking, technology adoption, urbanization, improvement in education, e-governance-based ease of doing business and other structural reforms, the report said.
“The increases would be driven by an increase in investments, but mainly, faster productivity growth," it said.
The report said that, by 2020, India’s economy could gain over 300 million more Internet users and 50 million more high school graduates. The country is reducing red tape by adding 200,000 bank accounts every day, and moving nearly 800 government services online, raising productivity.
“These changes can allow the economy to leapfrog a generation of creating physical infrastructure in retail, banking, and government services, and lead to a jump in productivity. In our baseline projections, the coming together of these forces can provide a substantial boost to GDP growth," the report said.
“In fact, if the reforms are faster, the country’s potential growth could rise to 9% due to reforms to labour, infrastructure, and education," it added.
In a conference call to discuss the report, Goldman Sachs’s chief India economist Tushar Poddar said India’s growth rate has typically been aided by higher productivity rather than by adding capacity through more labour forces and capital expenditure.
“India is traditionally a services-led country, but too much of debate is being subsumed by only manufacturing," Poddar said in the call, clarifying that services too needed to be in the focus, rather than stressing more on manufacturing-led growth. Increasing manufacturing may not help as much as desired as the world is already facing an oversupply in manufacturing.
But technology adoption, including adding more Internet and mobile users, will help the services sector boom. For example, in most emerging markets, in the past few decades, job creation in the services sector has been double than of manufacturing. In the case of India, there should be a greater focus on software than hardware and softer forms of capital expenditure should be given due emphasis, Poddar said.
“The Make in India initiative, Foxconn (Technology Group) coming to India... is fabulous," Poddar said, but now “there should be a little rethink on where the jobs are coming from".
“India’s model is more bottom-up (increasing productivity) rather than manufacturing growth," he said.
Assuming an unemployment rate of 7% as estimated by the International Labour Organization, Goldman Sachs estimated that about 70 million of additional labour force can be absorbed in the economy as the economy grows to its potential.
Overall, India’s productivity growth will come from addressing six key drivers—agriculture, infrastructure, micro environment (urbanization and ease of doing business), education, technology and governance, Poddar said.
Technology alone has contributed 1.9 percentage points to GDP growth over the past five years, and over the next five years, Goldman Sachs sees technology contributing 2 percentage points to GDP growth.
Similarly, governance structures have improved significantly and it now takes 30 days to start a business, down from 80 days 10 years ago.
However, the productivity growth in agriculture and infrastructure have been disappointing and they contribute lot less than they could.
“Over the past decade, infrastructure has contributed about 0.5 percent point to GDP growth. In our baseline, we assume that power consumption grows at 7.5%, and contributes 0.6 percent point to GDP growth," the report said.
Additionally, India’s urbanization rate is slow, adding only 0.3 percentage point to the annual GDP growth rate, compared with China’s 1.1 percentage points. But if initiatives such as the smart cities mission take off, urbanization itself will necessitate the growth of infrastructure and will lift up GDP growth rate.