India will overtake Germany in 2022 as the world’s fourth-largest economy, based on analysis of growth projections by the International Monetary Fund. Ranking countries and regions on their gross domestic product for 2017 and 2022 based on IMF forecasts, India, growing at 9.9% a year in nominal terms, will surpass Germany by 2022, with the UK dropping out of the top five after 2017.
Sure, the expansion rate is impressive. India could grow faster than 8% in the medium term as the nation prepares to implement a national sales tax from July, says Finance Minister Arun Jaitley. The goods and services tax (GST) could boost growth by as much as 2 percentage points. Greater tax compliance could lift revenues for the government, helping narrow Asia’s widest budget deficit and channel more funds for schools and highways.
India’s demographics are considered better than China’s. An ageing population and low birth rates are causing the prime working-age population - aged 15-59 - to decline in China. From 2015-2040, this group is estimated to shrink by more than 115mn, whereas India’s prime working-age population will increase by 190mn.
But here is the catch.
India’s economy is still recovering from the ban that sucked out 86% of currency in circulation near the end of 2016. Add to that the likely near-term disruptions from the GST implementation.
Going deep, economists are also concerned about India’s banking system and the overall health of its public finances, enough reasons for global agencies that already rate Indian debt just above “junk.’’ Bad loans, restructured debt and advances to companies that can’t service their debt have now risen to about 16.6% of total loans.
India is seen as a laggard on productivity, too. Of the potential global oversupply of 90mn low-skilled workers in 2020, 27mn will be in India, according to the McKinsey Global Institute. Labour productivity per person employed eased from 10% in 2010 to 4.8% in 2016 as reforms sputtered. According to the International Labour Organisation, output per worker is projected at $3,962 for India in 2017, a fraction of Germany’s $83,385.
Some seven decades after independence, India’s growth trajectory is firmer and potential more conspicuous. But the country needs to take bolder measures to anchor long-term growth and employ a workforce that will become the world’s largest by 2030. Overtaking Germany, the UK and Japan will require firm decisions to overhaul education and health standards with a sound economic policy.
India, for sure, can dream big. But the country’s policymakers need to learn from mistakes committed in the past to adopt a more stable framework for monetary and fiscal policy. The shallow, short-term economic thinking should give way to a sustainable long-term growth vision to lift millions of Indians out of poverty and ensure social inclusion.