The world economy is slowing even as India’s provides hope

The first chart shows the loss of global momentum. The horizontal axis shows the anticipated growth rate in a particular year based on the IMF forecast made five years earlier. So, the peak forecast for 2013 was made in 2008, before the North Atlantic financial crisis. The IMF says that the forecast for global growth for 2028 is the lowest made for any year since 1990.

All forecasts are prone to errors. However, the IMF says that its forecasting models have in fact been optimistic, which means that actual global growth has mostly been lower than what was expected by its economists five years earlier. Consensus forecasts by economists in the private sector have generally followed the same trend. The upshot: the gradual slowdown in the global economy since the financial crisis is unlikely to be reversed in this decade.

This is an important backdrop against which to think about Indian economic growth over the long term. This newspaper reported on Monday that Prime Minister Narendra Modi will unveil a new economic strategy document in December on what India needs to do to become a developed country by 2047. The strategy is being prepared by Niti Aayog in collaboration with senior government officials.

Economists at the Reserve Bank of India estimated earlier this year that the Indian economy will need to grow at a compounded rate of 7.6% a year for the country to reach developed country status by 2047. That is between 1.2-1.5 percentage points higher than what most economists consider to be the rate at which India can currently grow without sparking off either high inflation or stress in the balance of payments with the rest of the world.

The broad global slowdown that the IMF expects over the next five years will likely act as a headwind for India, perhaps not enough to slow down its economy from the average rate over the past four decades, but a challenge in the way of a significant acceleration in economic growth. India will have to negotiate not just a slowing global economy but also other challenges such as growing protectionism in response to the geopolitical situation as well as shocks from climate change.

Yet, even maintaining the current momentum should be more than enough to solidify the position of the Indian economy as the fastest-growing big economy (second chart). Before hubris settles in, it is important to remember that many miracle economies to the east of our borders were growing at least two or three percentage points faster when they were at the same stage of development.

Here are a few numbers to consider. The global economy is expected to add $29 trillion of additional output between 2023 and 2028. The two largest economies in the world, the US and China, will add $5.9 trillion of additional economic output each, or around a fifth of the additional global economic output over the next five years. India will add $2.2 trillion, making it the third-largest contributor to global economic growth.

In an insightful two-part research report, Barclays economists Rahul Bajoria, Shreya Sodhani and Amruta Ghare have taken a close look at Indian economic dynamics in the coming years. They argue that India can accelerate its growth rate after the 2024 elections without putting hard-won macroeconomic stability at risk. The building blocks of a move to a higher 8% growth trajectory would be a higher rate of nominal savings (up from 30.2% to 32.3% of GDP), a higher growth in the workforce led by higher female labour force participation (with the Indian labour force growing at 3.5% a year rather than the current 1%), a larger share of global exports (up from the current 2.4% to more than 4.5%) and better productivity of capital, (which entails the incremental capital-output ratio coming down from the current 5).

The Barclays economists also argue that there is a potential geopolitical advantage as well since India can overtake China in terms of its contribution to global economic growth. This goes back to the old view that an 8% growth rate is the best foreign policy that India can pursue.

The broad global consensus is that India will be one of the few bright spots in an otherwise tough global environment in this decade. It can accelerate even in a tough global economy, as some Asian countries did in the troubled 1970s. Higher savings, more efficient capital accumulation, more people (especially women) working in productive jobs and increased exports to complement domestic demand—these are the usual building blocks for raising the rate of sustainable economic growth.