India, second only to China by 2050, reveals Goldman Sachs report

India is on track to overtake Britain as the world's No. 5 economy within a decade and surpass the United States by mid–century, global investment bank, Goldman Sachs has stated in its latest report.

Productivity growth will help India sustain over 8 percent growth until 2020 enabling the world's largest democracy to not only surpass UK but become the second largest economy in the world, ahead of even the US, by 2050, the bank said.

"Our baseline projections for India's potential output growth show that the economy can sustain growth rates of about 8 percent till 2020, significantly higher than the 5.7 percent that we projected in our original BRICs paper," the bank said, adding, "The implication is that India's contribution to world growth will be even greater (and faster) than implied in our previous BRICs research."

The announcement came while the bank was scaling up estimates of the country's prospects in its October 2003 research paper widely known as the BRICs report.

The original report had projected that India's GDP will outstrip Japan's by 2032 and that in 30 years, it will be the world's third largest economy after China and the US.

However, according to the new report, India's economy will only be exceeded by that of China.

Indian reforms have increased competition and efficiencies and accelerated international trade, challenging the global economic order so that it will overtake Italy, France, Britain and eventually the United States, the report said.

"India's current growth rate of around 8 percent can be increased to 10 percent if the efficiency level in terms of productivity to capital employed is increased and the saving rate increases marginally to sustain the investment," the Goldman Sachs economic research report on global economics said.

India will need to boost its investment rate by 16 percent of gross domestic product to sustain a 10 percent growth rate, the report said. India appears at minimum headed toward a sustained growth rate of about 8.4 percent through 2020 and an average 6.9 percent through 2050.

"There has been a structural increase in India's potential growth rate since 2003 on the back of high productivity growth," the report said.

While many economists regard Goldman's Brics research mainly as a successful marketing tool for the investment bank, many in India see it as confirmation of the country's destiny as an economic superpower.

"We no longer discuss the future of India. We say, 'The future is India,'" Union Commerce Minister Kamal Nath said in a recent speech.

However, Jairam Ramesh, Union Minister of State for Commerce, was more cautious. "If a country of 1 billion people can't become the third–largest economy, we need our heads examined. What counts is per capita income. Let's not go overboard about the 21st century being India's century," he said.

The vote of increased confidence from the world's largest investment bank, whose previous chairman Henry Paulson is now treasury secretary in the Bush administration, comes when India is easing into its new seat in the global political arena as a nuclear power and consolidating its economic might as the world's services backbone.

The report said a turnaround in manufacturing productivity was central to lifting up the productivity growth. The private sector was the principal driver of this turnaround, as it improved efficiency in the face of increased competition due to the cumulative effects of a decade of reforms.

"The underlying reasons are: increased openness to trade, investment in information and communication technology, and greater financial deepening. These factors still have some distance to run," it said.

The higher growth rate under the new projections will have large implications for demand in the country, Tushar Poddar and Eva Yi, authors of the paper said.

From 2007 to 2020, India's per capita GDP in dollars will quadruple (a third higher than the original BRICs projections). Indians would also consume about 5 times more cars and 3 times more crude oil as compared to 3.5 times more motor cars and 2.3 times more oil estimated by Dominic Wilson and Roopa Purushothaman in the October 2003 report.

But, there are risks involved, the paper warned, adding that it stemmed from political issues (including a rise in protectionism), supply–side constraints (including business climate, education and labor market reforms), and environmental degradation.

"To embark upon its growth story, India will have to educate its children and its young people (especially its women) and it must do so in a hurry. Lack of education can be a critical constraint to the growth of the knowledge–based IT sector, as well as in the move to mass employment in manufacturing. The demographic dividend may not materialize if India fails to educate its people," the Goldman Sachs paper cautioned.

It said a decade of reforms in India has brought increased competition and efficiency; but poor infrastructure is already struggling to keep up with growth and may hold the country back.

There is not enough electricity to meet demand; ports are overflowing; and many roads are in poor condition, the report said, adding that a shortage of skilled workers may undermine the future expansion of India's IT industry.