The Telegraph
Since 1st March, 1999
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- Anyone interested in the Indian economy should read the BRIC report

The recent report on the BRIC nations ó Brazil, Russia, India and China ó has sometimes been quoted in Indian papers, but not in great detail. Anyone with an interest in the Indian economy should read the BRIC report. You will find it readily on the internet. More accurately, the BRIC report is Global Economics Paper No. 99, brought out by Goldman Sachs in October 2003, and is titled, Dreaming with BRICs: The Path to 2050.

Here are the startling facts for BRIC as a group. In less than 40 years, the BRIC economies can together be larger than the G-6 (United States of America, Japan, Germany, France, Italy, United Kingdom) in dollar terms. Note that these are not purchasing-power-parity dollars, but official-exchange-rate dollars. These are also real dollars, or if you like, todayís dollars. Of the current G-6, only the US and Japan will be among the six largest economies in the world in 2050. About two-thirds of the increase in the gross domestic product from the BRICs will come from higher real growth. The balance will be through currency appreciation and BRIC exchange rates may appreciate at an average rate of 2.5 per cent a year. As early as 2009, the annual increase in US dollar-spending from the BRICs can be greater than that from the G-6. By 2025, the annual increase in US dollar-spending from the BRICs can be twice that of the G-6, and four times higher by 2050.

The shift in GDP, relative to the G-6, takes place steadily over the period, but is most dramatic in the first 30 years. In 30 years, Indiaís economy is likely to be the third largest in the world, after the US and China. Note again that this is not in PPP dollars. Growth for the BRICs is likely to slow significantly towards the end of the period, with only India seeing growth rates significantly above 3 per cent by 2050. But individuals in the BRICs are still likely to be poorer on average than individuals in the G-6 economies, with the exception of Russia. That is, even after the growth, per capita income in BRICs will be lower than in G-6.

Okay, there may be some skepticism about what Goldman Sachs have to say on Brazil and Russia. But I donít think that there can be too much skepticism about the Indian projections. Several people have done projections for India, although these projections are usually upto 2020, not 2050. The Tenth Plan (2002-07) talks about 8 per cent GDP growth. Even if 8 per cent isnít likely, most people will accept 7 per cent as an acceptable trend over the next 20 years.

However, unlike Goldman Sachs, most economists donít usually factor in demographic transition in such projections. Letís state it simply. Fewer babies are being born in India now. At least at an all-India level. But several babies were born 20 or 25 years ago and those babies are now entering the labour force. This reduces the dependency ratio. Of course, productivity of these new entrants depends on whe- ther they have education and skills and whether jobs can be found for them. East Asia went through this demographic transition 20 to 30 years ago and econometric estimates suggest this demographic transition added a clear 2 per cent to GDP growth in east Asia. Even if we donít get an increment of 2 per cent, why should we not get an increment of at least 1 per cent thanks to demographic transition' Today, the rate of population growth is around 1.8 per cent and should slow down to 1.5 per cent in the next 10 years, and to perhaps 1.3 per cent in the subsequent 10 years. If you take away 1.5 per cent from 7 per cent, you still get 5.5 per cent per capita GDP growth. In other words, 5.5 per cent is perfectly reasonable.

Compare this 5.5 per cent with what Goldman Sachs have, broken up into a productivity gains contribution and a demographic component. The assumed per capita GDP growth is 3.7 per cent for 2000-05, 7.5 per cent for 2005-10, 7.4 per cent for 2010-15, 7.2 per cent for 2015-20, 7.4 per cent for 2020-25, 8.2 per cent for 2025-30, 8.9 per cent for 2030-35, 8.9 per cent for 2035-40, 8.3 per cent for 2040-45 and 7.6 per cent for 2045-50. You get such precise numbers because they come out of a model.

The difference with traditional economic forecasting is that no economist normally dares to forecast or predict exchange-rate behaviour. Hence, if you find an economist juggling around with that 5.5 per cent per capita, that growth will be applied on todayís base per capita income of say 500 US dollars, assuming the exchange rate stays unchanged. Goldman Sachs convincingly argue that with growth, there will be capital inflows and with capital inflows, the rupee has to appreciate.

Remember that average appreciation of 2.5 per cent a year. Since per capita income is a rupee figure, any rupee appreciation vis-à-vis the US dollar, results in a higher dollar per capita income figure. Think of it slightly differently. Before the reforms started, the rupeeís exchange rate vis-à-vis the dollar was around Rs 21. Today, it is around Rs 45. Had the exchange rate continued to be Rs 21 to a dollar, the Indian per capita income today would have been around $ 1070, not $ 500. Goldman Sachs rightly argue that as economies develop, you canít mess around with the exchange rate. It attains its true value.

Part of the reason (roughly one-third of the reason) why Goldman Sachs get higher per capita growths than other projections is because of this exchange-rate appreciation. As I said earlier, you will find the detailed assumptions in the model, in the paper that is freely available on the internet. But to me, the assumptions seem to be perfectly realistic ó not best-case scenarios, but most-likely scenarios.

What kind of dollar per capita incomes do these growths translate to' 468 dollars in 2000, 559 in 2005, 804 in 2010, 1,149 in 2015, 1,622 in 2020, 2,331 in 2025, 3,473 in 2030, 5,327 in 2035, 8,124 in 2040, 12,046 in 2045 and 17,386 in 2050. The mind begins to boggle because these are stretched to beyond 2020. Several people have talked about around 1,500 in 2020 and no one has batted an eyelid. It becomes easier to appreciate these numbers if we link them to where other countries are today. In 2010, we will be roughly where Ukraine is today. In 2015, we will be roughly where Paraguay is today. In 2020, we will be roughly where Iran is today. In 2025, we will be roughly where the Dominican Republic is today. In 2030, we will be roughly where Latvia is today. In 2035, we will be roughly where Hungary is today. In 2040, we will be roughly where South Korea is today. In 2045, we will be roughly where Greece is today. And in 2050, we will be roughly where Italy is today. Remember that we have an enormous amount of catching up to do.

That per capita income of 17,386 dollars in 2050 may make us salivate. But in 2050, Brazil will have a per capita income of 26,592, China of 31,357, Russia of 49,646, France of 51,594, Germany of 48,952, Italy of 40,901, Japan of 66,805, UK of 59,122 and US of 83,710. To me, the importance of these numbers lies elsewhere. After all, per capita income is only a means. It is not the end product. To me, improvements in human development indicators are much more important. Thatís when a country becomes ďdevelopedĒ and that is not something the present Goldman Sachs report is interested in. But using these figures, I can hazard a guess that we are looking at around 2042, when the per capita income threshold of 10,000 dollars is crossed. Certainly not in 2020.

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