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February 21, 2018

Citi GPS: Securing India's Growth Over the Next Decade

Twin Pillars of Investment & Productivity

"When we developed the Citi GPS product, we chose to focus our interests on how to deliver sustainable and inclusive global growth and make globalization a positive force. When we’re thinking about topics and debating over the importance of events, from climate change and gender equality to Brexit and populist elections, we try to drive the conversation back to the basic question of how whatever we’re talking about will impact global growth. If we can bring the vast amount of issues being discussed throughout the world down to an economic argument, we believe it makes the debate richer and takes it from being philosophical to being grounded in the real world.

In this report, we look specifically at India and what types of pillars can be identified to drive the country’s growth over the next decade. Although the past does not guarantee future results, we thought the best place to start the journey of how India can transform itself from an emerging economy to one that grows with a sustained GDP growth rate of 8%+, is to look at the lessons learned from countries which have already succeeded in this transition. We found that growth in labor productivity of over 6%, growth in investment of over 10% and growth in the overall efficiency of production (the Total Factor Productivity) to 3% were the three primary drivers of GDP growth across our sample of countries. The final piece in the growth puzzle was that poorer economies grow faster and in 60% of cases, those countries with 8%+ GDP growth had per capita income of less than $10,000.

In order to achieve investment growth in the double digits and to create employment opportunities for its swelling labor force, India will need to industrialize further and target manufacturing as a share of GDP to rise to 25% by 2025 from its currently level of 18%. To do this, a new potential leading sector in manufacturing must be identified based on size, productivity, employability, and exportability. Our analysis identifies chemicals (including pharmaceuticals and petrochemicals) as a promising candidate to move up the value chain, as well as food processing and textiles & apparel.

In a previously Citi GPS report Infrastructure for Growth, we estimated that, on average, a 1% increase in infrastructure investment is associated with a 1.2% increase in GDP growth. In the case of India, we estimate that total infrastructure spend could be around $3 trillion in the next 10 years bringing the infrastructure-to-GDP ratio up to 6.5-7%. Projects in physical infrastructure (power, ports, roads, rails, telecom), reforms in input markets (land and labor), focus on soft infrastructure (healthcare reforms, education) and the harnessing of resources (oil & gas, coal, cement, iron & steel) would all lead to higher productivity and growth rates.

Finally, exports as a productivity driver and employment creator could play a significant role in total factor productivity growth. If India can increase its exports-to-GDP ratio (including service exports) to at least 20% by 2021, India’s exports could reach ~$700 billion.

The result of all of this growth would be higher per capita income, increasing urbanization, and a shift in consumer patterns as India moves up the ladder from a low-growth to a high-growth economy.

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