India in 2050

Napoleon once said, “Let China sleep, for when China wakes up, she will shake the world.”

China has woken up. It is investing nearly half its GDP — that’s simply unprecedented. No other economy, at no other time in history, has invested capital on that scale. To call this “hyper”-investment is like comparing the Sun’s luminosity to a street-lamp. At the peak of its economic miracle, Japan was investing only 30% plus of its GDP — but China is doing 50%!
Over 200 years of economic experience tells us that hyper-debt-fuelled-investment creates a bubble and ends in a dreadful collapse. But China has consistently defied all such prophesies of doom. Frankly, it may not be too bizarre to believe that China could be scripting a new economic logic. Traditional theory says that investment should be “sustainable”, that is, it should be “matched” by rising consumption. But what if you pump so much capital into your economy — similar to putting extra fuel into a rocket — that you “escape” the gravitational pull of low thresholds? Especially if the bulk of your capital is spent on infrastructure (roads, railways, schools, irrigation canals, dams, hospitals, ports), as against factories which produce toys and televisions? This could be the Chinese masterstroke, the single discontinuity which could defeat 200 years of economic wisdom. Ultra-big manufacturing factories may create waste and over-capacity, but mammoth infrastructure could trigger higher productivity and the ability to create wealth. So it may be a fatal mistake to look at China’s investment spree in a single lump of factories-plus-infrastructure. Huge capital spending on life-enhancing social assets, like schools, research labs and hospitals, may actually empower people. By rapidly educating its workforce, by brilliantly executing immensely large projects, by importing expertise and dollars in a shrinking world, China could be creating a “shower of wealth and productivity” such that consumption eventually “trickles through” into the bubble.

Now look at India — that’s a classic textbook case. India’s structure is an uncanny prototype of a “promising” economy. Well above half its GDP — nearly 55 percent — is consumed by over a billion people, giving it the kind of organic strength that transformed the economies of the US, UK, Germany and Japan. Just its rural economy is made up of 800 million people spending over $425 billion. This, when agriculture’s share is declining, manufacturing is rising, and services are already more than half the GDP — again, a classically attractive mix. Like China, India saves nearly 40 percent of its GDP, but the bulk comes from households (as against China, where state-owned corporations with somewhat contrived accounting contribute more than households). India’s resource consumption has decreased for every incremental dollar of GDP since 1991 (as against China, which was using three times more resources per dollar of GDP than India). India’s economy is healthily private, with state-owned corporations accounting for less than a tenth of the output. At slightly over a trillion dollars, its stock market capitalization is about equal to its GDP — another beautifully balanced economic attribute. Its foreign reserves are over a quarter of a trillion dollars — neither uncomfortably high, nor low. Its bank credit is roughly equal to half its GDP (as opposed to over 150 percent for China), while bad loans are at an astonishingly low 2-3 percent in a world devastated by toxic financial assets (recall that China’s bad debts are precariously estimated at between 30-50 percent, the large range itself betraying a huge risk of fuzzy estimates).

The Indian Rupee largely floats against world currencies — it danced in a 25 percent band after Lehman’s collapse in 2008, without disrupting anything. A red rag is India’s weak government budget and rather high public debt at 80 percent of GDP — but here again, the highly vulnerable dollar loans are paltry by Asian standards. India is in a very sweet demographic spot, being the youngest country in the world — half a billion people are less than 25 years old, giving it a unique “demographic dividend” among peers. Ten of the world’s 30 fastest growing cities are in India — its urbanization rate, at 30 percent, is accelerating. With 350 million people displaying a reasonable proficiency in English, it’s the largest English-using country in the world. Its judicial system is robustly based on English Common Law. It’s a genuine, albeit imperfect, democracy.

Now billions more are getting somewhat rich (but not “very rich”) at a reasonable clip (but not “rapidly”) — as soon as one sub-economy becomes rich (the west coast of China or south India), the growth wave moves to the next-in-line poorer one (central regions in China or north India). Earlier, the smaller rich economies made a “one time transition” over a few decades — but China and India, because of their large numbers, could see “serial transitions” as one sub-economy after another hits higher living standards. This could make their growth stories far more elastic — with repeated “rebounds” from “slowdowns”, as one sub-economy plateaus but another begins firing on all cylinders. What’s more, this uncharted dynamic is happening simultaneously across both countries in a contiguous part of planet earth. The centre of economic gravity is shifting from some point in the Pacific Ocean to a dot near Mount Everest.

This power shift of civilizations could be the most dynamic idea of the 21st Century. Both China and India were giants in the 17th and 18th Centuries — according to economic historian Angus Maddison, together they accounted for over 50 percent of world GDP in 1600 (China had 28 percent and India, 23 percent). But 200 years of colonial domination shrunk their economies and political space on the globe. Over the last few decades, both countries are beginning to rear again — the initial swell of a giant tidal wave that made its last crest in 1770.