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India: Asia’s new giant emerges

India’s recent rapid growth masks the fact that it still lags far behind China in terms of its economic development. Its catch-up potential remains huge, and its growth could be even faster. By Diana Choyleva and Maya Bhandari.

World Economic Forum special report: Contents

India has been investors’ emerging market darling for a couple of years. It has lifted its growth trend from the socialist 3.5% “Hindu rate” of the 1970s, to 5.5–5.75% in 1980-2000, and now 6.5%. Its large, educated, English-speaking labour force has made it less reliant on export-led growth, China-Tigers-style, more on human capital. Savings and investment have risen to 27% and 30% of GDP respectively in 2005 – fuelling growth through a relatively developed financial sector without an “Asian glut” of savings. Finally, its well-trenched legal system, corporate governance and democratic polity make it a favourable destination for foreign investors.

Recent GDP growth of 9% is well above the 6.5% trend This is not the new “trend” – or not without major reforms – contrary to some hopes. Growth of 8% in the past three years follows three years averaging under 5%. India has excess demand and constrained supply – hence the current deficit, 3% of GDP. Per capita income is 8.2% of America’s in purchasing power parity, and only 44% of China’s – therefore plenty of catch-up potential remains. Although its PPP GDP is fourth in the world, just behind Japan, its share of world GDP is under 2% at current exchange rates, and of world trade under 1%.

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