India Economic Growth Forecast: Strong Demographics Vs. Weak Infrastructure

Economists Siddhartha Sanyal and Rahul Bajoria of Barclays Capital forecast India’s economic growth will be 7-8 percent per year during the next three to five years.

India has enjoyed high economic growth rates since the economic liberalization of the 1990s, which cut red tape and stimulated competition. Those reforms helped unleash the country’s enormous potential.

India benefits from an English-speaking population, favorable demographics, strong domestic consumption, and a booming services sector.

Demographics

Among major economies, India has one of the fastest-growing and youngest populations.

Its population growth rate is ranked 93 of 232 countries in the world, and its median age is ranked 100, according to the CIA World Factbook.

These demographics are favorable in a capitalistic country that fosters economic development because consumer demand will continually rise and the resulting economic growth will facilitate debt repayment.

India’s educational system also produces a large number of competent English speakers. Many of them are in technical fields, which helps the country compete in the international business arena.

Domestic Consumption and Services Sector

During the early part of India’s economic boom, externally oriented services sectors such as information technology and the like played a major role.

Today, however, growth in fields like financial services, transportation, and communication are more prominent and mostly focused on the domestic market.

This focus has made India’s economic growth less volatile and more dependable, according to Sanyal and Bajoria.

However, it also makes India’s growth unbalanced in some ways.

The country’s growth style has been criticized for its slow pace of job creation, especially for the poor. Moreover, the slower rates of growth in industry and agriculture, combined with the rising income of those who work in the services sector, stokes inflation in food and physical goods.

Infrastructure Constraints

The growth in industry and agriculture did not take off in the same way it did in the services sector because of India’s infrastructure weakness.

In the industrial sphere, Sanyal and Bajoria cited the poor state of power, highways, and mining. In the agricultural sphere, they cited the lack of irrigation, storage, electrification, education, and health care.

Even in terms of human capital, India has a two-track growth dynamic: strength in high-end urban segments and weakness everywhere else.

Sanyal and Bajoria blamed India’s weak infrastructure on a lack of funds, poor planning, poor execution, and the country’s general inability to invest for the long term.

Structural Reforms?

With its favorable demand-side situation (i.e. demographics), India actually could grow faster than 7-8 percent per year.

For that to happen, however, India would need to undergo structural reforms, especially when it comes to capital spending by the government.

Sanyal and Bajoria are not optimistic this will happen.

Politics in India have long been fractured. And, recently, political scandals have helped put economic reforms on the back burner.

According to Sanyal and Bajoria, the political picture has hobbled India’s growth story. The political inertia that is smothering the issue of economic reforms needed to boost national growth is starting to chip away at the economy’s growth momentum.”

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