Goldman Sachs as Goldman Sach?
A
research study prepared recently by two economists at Goldman Sachs,
New York on the growing importance of the BRIC countries-Brazil, Russia,
India and China– has hit world headlines. The Deputy Prime Minister
is his attempts to propagate the “feel good” factor at home
has punned that it is actually Goldman Sach report. One of its authors,
Rupa Purushothaman had become a celebrity of sorts here and amongst
NRIs. The report suggests that India is on it way to becoming the world’s
third largest economy by 2050. That India will become the world’s most
populous country by then is certain. Whether, however, it will achieve
the distinction accorded to it by the prestigious Wall Street investment
bank is an entirely different matter and now depends entirely on its
politics.
India is already the world’s fourth largest economy, just behind Japan
but considerably behind the Big Two-the USA and China. It will certainly
overtake Japan by the end of this decade. This is based on GDP measured
in terms of what economists call purchasing power parity (PPP). Because
exchange rates do not reflect international differences in relative
prices, GDP estimates are converted into internationally comparable
dollars using PPP rates. PPP conversion factors are derived from periodic
price surveys and subsequent estimations by the World Bank. This factor
is almost 6 in India and reflects the lower price of services here.
When ranked by GDP based on market exchange rates, India’ s global ranking
drops to twelfth, while China drops to sixth position. Unlike most such
reports, the Goldman Sachs analysis uses market exchange rates and not
PPP. That is one reason, apart from the Goldman Sachs name itself, why
its results have evoked such tremendous interest both in India and elsewhere.
The Goldman Sachs report makes much of demographic change and its impact
on economic growth. It is not the first to do so. Six years ago, David
Bloom and Jeffrey Sachs of Harvard University authored a major study
for the Asian Development Bank entitled Emerging Asia: Changes and Challenges
in which they estimated the positive contributions to economic growth
from an increase in the working-age population (25-59). The conclusion
was that between 1965 and 1990, almost a third of the growth in GDP
per person could be explained by such a demographic change and that
in the next quarter of a century, South Asia could replicate that experience.
Of course, if fertility declines were faster-particularly in the northern
states–India could enjoy an even larger demographic gift. But countries
do not reap the benefits of demographic transitions automatically. It
all depends on policy choices.
The projections on India’s future growth trajectory do not appear to
be too unrealistic, even though the projection for China’s growth declining
sharply from 2010 onwards could be questioned. Goldman Sachs assumes
that India will grow consistently at 5%-6% per year for the next fifty
years. But since 1980, India has indeed averaged an annual growth rate,
compounded, of 5.7-5.8% per year, as compared to around 3.5% during
1950-1980. That India has demonstrated its growth potential in a robust
manner in the past two decades is obvious. However, this growth has
not generated global demand and may well not do so to the extent the
Goldman report assumes given our somewhat unique consumer psychology.
Growth in India is not having the same dramatically visible impact as
in China because the nature of growth in India has been different-growth
is much less because of agriculture, much less because of labour-intensive
manufacturing and much less accompanied by quick urban renewal. The
Deputy Prime Minister has revealed a fondness for puns. He might do
well to recognize that the national bird of any booming economy is the
crane that is absent in India. Single-minded focus on increasing the
quantity of growth is important but an obsession with enhancing its
quality is crucial.
