07 June 2016 13:31:26 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment. He lives with his wife and son in Texas. Rao has been a columnist for from the year the website was launched, in 2015, and writes regularly for BusinessLine as well. Twitter: @rajkamalrao

India’s GDP could double in 8 years

While there is no doubt that India is shining now, sustaining the growth depends on various factors

The World Bank; Moody’s; Forbes; CNN Money; The Wall Street Journal — it doesn’t matter which global organisation or news outlet you consult. The headline is the same.

“India’s economy is booming.”

For the quarter ending March 31, growth was up 7.9 per cent over the same period the previous year. For the entire year, it was up 7.6 per cent. At these rates, India’s economy is growing at the fastest pace when compared with other major economies.

To appreciate how good India is having it now, look at the GDP growth of other countries, as forecast by the OECD.

Growth in the 15-country Euro area is 1.75%. The US is at 2.5%. Japan is 0.96%. The Russian and Greek economies are expected to shrink this year, at -0.4% and -1.2% respectively.

So the world’s big economies would readily trade their situations with India’s.

The only major economy which is doing well is China, and it is expected to grow at 6.5 per cent. But China has set such unrealistic expectations for itself over the last two decades — by sometimes growing at close to 10 per cent — that 6.5 per cent somehow looks terrible. It is like that bright college student who always outperforms everyone each year but falls to second place during one year, inviting scorn for his lacklustre performance.

The troubling story

Once the GDP growth numbers come out, economists like to analyse why countries are doing the way they are. And this is when China’s growth story becomes troubling.

China, as the world’s factory, relies heavily on exports to keep its economy humming. Its 2015 exports alone were valued at $2.28 trillion — more than the size of India’s entire annual GDP ($1.88 trillion). When countries that buy Chinese goods don’t do well, China’s export model comes under pressure.

To keep economic activity high, the Chinese government, through state-owned banks, has been pumping in billions of dollars through massive borrowing. Factories continue to churn out products, even though there aren’t as many buyers as before. This creates a glut of everything, right from cement to steel.

Oversupply always causes price reductions and this further pressurises the country’s giant export machine. Debt and an economic bubble created by it are therefore major causes for concern.

A rising tide

Because of India’s dependence on foreign oil, it always end up importing more than it exports. While exports are crucial to India’s emergence as a top economy, they are not quite as important as they are to its neighbour. India is the world’s darling for this reason — it is one of a few economies that relies on domestic consumption for its growth. As India’s middle class expands, the country needs more of everything — air conditioners, shampoo, clothes, et al.

The multiplier effect when consumers spend is real, and this results in even more economic activity. More economic activity creates more disposable income among India’s poor to acquire products and services they could only previously dream of. As President JFK said in a speech to the Economic Club of New York more than 50 years ago, “A rising tide lifts all boats”.

The rule of 70

This rising tide is unbelievably powerful. Because economic growth always compounds year over year, the rule of 70 applies.

Simply take the number 70 and divide it by the growth rate. The site dedicated to financial information, Investopedia, says the result determines how long it would take to double your money.

So if India can maintain a 7.6 per cent annual growth rate, its economy can double in size in 70/.076, which is about 9.2 years. And in another nine years, it can double again. So by 2034, India’s economy could be nearly $7.2 trillion.

Troubles on the horizon

Of course, there are real troubles on India’s horizons as well. India’s population growth rates are alarming.

The UN estimates that by 2030, India’s population would have grown by about 24 per cent to 1.5 trillion. This can create severe problems for land, water and the environment, as a wealthier economy consumes more from Earth than it can give back. After all, the per capita income would have grown from $1,500 to $4,800, a fabulously impressive number — only if we had natural resources to sustain such growth.

Also, it is not entirely clear if India can continue growing at more than 7.5 per cent-level for such a long period. India’s education deficit is real, with more graduates not ready for careers; the country’s infrastructure deficit is real too — the nation simply cannot build roads, bridges and ports fast enough; world events, over which India has little control such as war, terrorism, the price of oil, currency manipulation by foreign countries, another global financial crisis — all these can throw a spanner in India’s growth machine.

But these caveats are true, regardless of India’s current situation. What is remarkable is how far India has come since the Manmohan Singh-led economic reforms of the early 1990s. And how a market-based economy is a vastly superior alternative to the socialist agendas promoted by our country’s early leaders, and remarkably, in this day and age, by the Democratic Party in the US.

It is a message that PM Modi would do well to bring during his joint address to the US Congress on June 8.