India has the potential to be larger than the US economy in 42 years, but there are certain areas like fiscal discipline where the country has to make efforts, says a report by US investment bank Goldman Sachs.
At the current size of the world's largest economies in 2007, India has nestled close to Brazil and Russia, at around $1.2 trillion (Dh4.40trn).
"This exciting potential is closely linked to India's remarkable demographic advantage. Turning this potential to reality is a huge challenge. Allowing the rising population to be successfully productive in the workforce is key for India – and probably for the world as a whole," said the report.
To place India's demographic potential into some perspective, the projected UN population increase from 2000 to 2020 is 310 million, about the same size as the US population today. India will in effect create the equivalent of another US, and for those of working age, India will create the equivalent of the combined working population of France, Germany, Italy and the UK.
Speaking about the concern areas for the future, the report says that India's gross fiscal deficit remains one of the highest in the world and, recently, government liabilities have been increasing at an alarming rate. It is estimated that the overall government deficit stood at under six per cent of the GDP in 2008 and may soar past seven per cent in 2009, due to a large debt-waiver for farmers, a big wage hike for civil servants, increasing fertiliser and oil subsidies, and higher exemptions on income tax. "At such high levels, government borrowing crowds out private sector credit, keeps interest rates high, adds to already high government debt, and becomes a key source of macro vulnerability. Further, the composition of spending is undesirable," the report said.
Expenditures are directed less towards productive investment – especially in much-needed areas such as health, education and infrastructure, which could enhance growth, but rather on wages and subsidies. These do not improve long-term growth potential. One example places this in context: India's central government subsidy on food, oil and fertiliser is equivalent to the entire collection on income tax," the report stated.
The report favours a medium-term strategy for fiscal policy, which will reduce the overall deficit.
"For a nation that is rightly proud of its democracy and has a history of reasonable stability in terms of inflation, we believe formal Inflation Targeting (IT) should become a centrepiece of a clearer, more defined and credible medium-term framework for macroeconomic stability," the report said, adding that there should be greater independence for the Reserve Bank of India (RBI) and the abolishment of all forex controls.
"We are well aware of some of the difficulties, both real and perceived for India to adopt these choices, but we think it is in India's best long-term interests to undertake these steps.
"IT has given major benefits to a broad variety of countries, ranging from 'developed' countries [such as New Zealand, Sweden and the UK] to 'developing' ones [such as Brazil, Korea and South Africa]. For India, there are probably powerful benefits," it added.
"It would be a powerful signal for its 1.1 billion people to know macro-economic stability for the RBI is dominated by the goal of keeping inflation low. We would not want to prescribe the appropriate range with confidence, but around four per cent to seven per cent might be sensible if it were introduced today," it said.
Ten things to achieve 2050 potential
Improve governance: Without good governance, India will find it difficult to educate citizens, build infrastructure, increase agricultural productivity and ensure the fruits of growth are well established.
Raise educational achievement: This is a requirement to help achieve India's potential. An effort to boost basic education is needed.
Increase quality of universities: Need for a more defined plan to raise the number and quality of top varsities.
Control inflation: Although India has not suffered particularly from inflation, it is currently experiencing a rise similar to that seen an other emerging economies.
Credible fiscal policy: Must introduce a more credible medium-term plan for fiscal policy. Targeting low and stable inflation is not easy if policy is poorly maintained.
Liberalise financial markets: To improve further the macro variables within the GES framework, further liberalisation of Indian financial markets is necessary.
Increase trade with neighbours: In terms of international trade, India continues to be much less "open" than many of its other large emerging nation colleagues. India should target a major increase in trade with China, Pakistan and Bangladesh.
n Increase agricultural productivity: Specific and defined plans for increasing productivity in agriculture are essential, and could allow India to benefit from the BRIC-related global thirst for better-quality food.
Improve infrastructure: Focus on infrastructure in India is legendary, and tales of woe abound. Without such improvement, development will be limited.
Improve environmental quality: Achieving greater energy efficiencies and boosting the cleanliness of energy and water usage would increase the likelihood of a sustainable stronger growth path for India.