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India in 2025: What Kind of a Superpower?
By Anil K. Gupta

 

AS RECENTLY as the early 1990s, much of the world thought of India as an exotic land full of saffron-robed priests, snake charmers, cows, beggars, maharajahs and the Taj Mahal. The last 15 years have utterly transformed the stereotypes. While India's exotic features remain a part of the country's fabric, it is the economic India that occupies much of the world's attention today.

 

With a GDP growth rate averaging 8 percent over the last decade, India is second only to China as one of the world's fastest-growing large economies. In this article, I reflect on the factors that have propelled India's transformation, where the country is headed over the coming decades, the challenges it must overcome to realize the hopes and ambitions of its billion-plus citizens and the kind of superpower India is likely to become.

 

 

 

DRIVING TRANSFORMATION

 

India's economic transformation began in 1991. Faced with near bankruptcy, the government started dismantling the "license Raj" that had shackled the private sector by controlling even little things such as the price of soap. This policy shift unleashed entrepreneurship on a grand scale, a phenomenon that continues to gather momentum. A second factor was the country's global advantage in information technology and other knowledge-intensive services. Over the last ten years, India has emerged as the world's No. 1 destination for outsourcing of everything from low-end services such as call centers to high-end work such as pharmaceutical development, data analytics, financial market research and legal services. The third major driver of growth has been a major ramp-up in levels of domestic savings and investment. In the early 1990s, India's gross capital formation stood at only 24 percent of GDP. Since then, it has increased rapidly and now stands at almost 40 percent of GDP, only slightly smaller than China's and almost double that of every other large economy in the world.

 

A growing chorus of analysts at banks including Goldman Sachs, Morgan Stanley and Standard Chartered now predicts that, over the next 10 years and beyond, India's GDP will grow even faster than China's. Three main factors underlie such forecasts. First, India is now investing in infrastructure with the same vigor that China did from 1996. From then to 2005, China spent 8.2 percent of its GDP on infrastructure; India spent only 4 percent. In the current five-year plan (2007-2012), India has spent about 7.5 percent of GDP on infrastructure. The 2012-2017 plans are even more aggressive, with the goal of investing $1 trillion on infrastructure — over 9 percent of GDP. Infrastructure investment will likely boost GDP growth by ushering in a manufacturing revolution to rival China's performance over the last two decades.

 

Second, India will benefit from a demographic advantage over China. With a median age of 25 years, India's population is much younger than China's, where the median age is 34 years. As a direct result of its one-child policy, China has now become one of the fastest-aging societies in the world. China's dependency ratio — the number of people who are very young or very old divided by the number of those of working age — hit a plateau in 2010 and will keep rising for the next 30 years. In contrast, India's dependency ratio will keep declining during this entire period. These twin trends will lead not only to a slowdown in China's growth rate but a rise in India's growth.

 

Third, the days of export-driven growth in China's economy are over. During 2000-2010, China's exports grew at over 20 percent annually, twice the pace of growth in world trade. As a result, China's exports increased their share of world trade from less than 4 percent to about 10 percent, higher than that of any other country. If this trend were to continue over the next 10 years, by 2020 China's export share would increase to 25 percent — a political impossibility. As the growth rate in China's exports slows, India's exports are likely to pick up, a direct result of the infrastructure and manufacturing revolution currently underway.

 

CHALLENGES AHEAD

 

Notwithstanding India's promise, sustaining rapid growth will require the country's elite — government, media, academics and other key members of civil society — to confront and overcome a number of challenges. The first will be educating the country's masses of young people. India may be home to some of the world's best engineering and business schools, but the overall level of adult literacy is pitifully low at about 63 percent. The bulk of the work here will need to be done by the private sector. As 3G and 4G wireless technologies get rolled out nationwide and as low-cost tablet computers become commonplace, there will be unparalleled opportunities for the private sector to bring outstanding self-learning material to even the remotest villages. The second major challenge is the scourge of corruption. While corruption always leads to misallocation of resources, in a country such as India its effect can be particularly nasty as it leads to massive exploitation of the very poor who have almost no power to pass on the costs of corruption to third parties. The third major challenge is the imperative for much greater efficiency in using resources, especially in energy. India relies on imports for a bigger proportion of its oil and gas needs than any other large emerging economy, including China. As India's economy continues its rapid growth, the situation is likely to get worse. The consequences are clear. One possible outcome is that India hits a resource-scarcity wall and growth comes to a screeching halt. An alternative scenario is that the country's industry, government and consumers respond vigorously to the need for greater efficiency and the development of renewable energy sources.

 

WHAT KIND OF SUPERPOWER?

 

If India can sustain annual GDP growth of 9-10 percent over the next 15 years, by 2025 it will likely overtake Japan and be the world's third-largest economy after China and the United States. Given the pace and magnitude of the structural transformations in the global economy, it seems appropriate to start speculating now on what kind of a superpower India will be or could be.

 

In looking ahead at the India of 2025, it is important to remember that complex adaptive systems cannot change their stripes once they have evolved. The rules that guide how a system evolves determine its end-state. In short, how India becomes a superpower will predefine its structure, mindset and behavior. Thus, the question of what India will be like in 2025 is important not just for then but also how the country should manage its journey.

 

First and perhaps foremost, India's emergence as a superpower will serve as a vivid showcase for the idea that it is possible to lift hundreds of millions of people out of poverty within one generation while embracing pluralism, a free press and vibrant democracy. India's rise will put to rest the idea that a command-and-control political system is the only viable route to economic salvation and that democracy is somehow antithetical to rapid economic growth. India's rise will provide a credible, proven and alternative model to the one currently being provided by China.

 

Second, India has the potential to serve as a leading example of how to combine rapid economic growth with fairness towards and inclusion of those at the bottom rungs of the ladder. In a democratic system such as India's, where even the poorest people exercise their political rights actively, uplifting not just the better off but also the poorest will be critical for social stability. In order to keep up a rapid pace of economic growth, India will have to embrace fairness and inclusion with unprecedented gusto and commitment. As it becomes a great power, these values will likely become an enduring part of the country's DNA.

 

Third, India will likely emerge as one of the world's leaders in leveraging information technology to boost the effectiveness and efficiency of its institutions — corporations, government and civil society. The country has already emerged as the global leader in the delivery of IT-enabled services to the rest of the world. Industry leaders (Tata Consulting, IBM, Infosys and others) are focusing increasing chunks of their attention on India's domestic market. Importantly, as 3G and 4G wireless connectivity becomes widespread over the next five years, it is a near certainty that we'll see a rapid diffusion of low-cost tablet computers along with free or near-free applications aimed at self-learning, mobile banking and commercial productivity. India in 2025 could well emerge as one of the world's most connected and IT-savvy societies.

 

Fourth, India is likely to become a world leader in market-driven innovation. Adversity combined with ingenuity has always been the mother of innovation. Think of how Japan emerged as the world leader in lean manufacturing. Given very high population density and scarcity of land, companies such as Toyota could not afford to build Detroit-style automobile plants. In response, what Toyota did was to invent just-in-time inventory management, total quality management, long-term partnerships with suppliers and other complementary processes that enabled the near-complete elimination of wasted space. Think now about the fact that even as India becomes the world's third-largest economy, it will still be one of the world's poorest countries (in per capita terms) for the next two to three decades. Low income levels will continue to provide a very large opportunity for India's entrepreneurs to emerge as leaders in frugal innovation, i.e. the design, production and delivery of ultra-low-cost products and services. Virtually all of this innovation will be driven by the market, not technology, and is likely to become an integral part of the country's corporate mindset.

 

Fifth, India in 2025 is also likely to emerge as one of the world's most entrepreneurial societies. Given a culture of individualism, Indians are "born" entrepreneurs. They also benefit from the fact that, relative to China, India's economy depends far more on pure private sector enterprises than on state-led ones. These entrepreneurs will not only serve as the engines for the country's rapid economic growth but will also benefit from the vast new opportunities that a larger economy will open up for them — both domestically and globally.

 

Last but not least, India has the potential to become one of the world's least corrupt developing economies by 2025. Given the daily media headlines about ubiquitous corruption in one sector after another (telecoms, real estate, financial services, you name it), this prediction may appear hard to swallow. It would also be foolish to assume that those Indian industrialists, politicians or bureaucrats who have mastered the art and science of corruption will somehow undergo a transformation in their value systems. One should remember, however, that today's media headlines are more likely the result of far greater vigilance and exposure than an increase in already high levels of corruption.

 

A new "Right to Information Act" passed by India's Parliament in 2005 empowers every citizen to request information from a public authority, which must comply within 30 days. Over the coming years, a combination of factors — the information act, a rapidly growing and educated middle class and a merciless and very free media — could well ensure that the likelihood of getting away with corruption will decline rapidly.

 

Should one be inclined to think that the above predictions are little more than pie-in-the-sky, it would be well to remember that India will not emerge as a superpower unless it is smart about managing the process of getting from here to there. These processes will have a direct bearing on how the country is organized, how it thinks and how it behaves by the time it attains superpower status. The seeds are being planted right now. Just look at Gujarat and Bihar, one of the richest and one of the poorest states, respectively. The chief ministers of both of these states have impeccable reputations for being free from corruption and focused on economic development rather than cronyism or feather-bedding. Recent elections saw both chief ministers get reelected handily — a clear sign that voters are willing to reward economic performance.

 

Anil K. Gupta is Michael Dingman Chair in Global Strategy and Entrepreneurship at the Smith School of Business, the University of Maryland at College Park. He is also currently Visiting Professor of Strategy at INSEAD in Singapore. A co-author of Getting China and India Right (2009) and The Quest for Global Dominance (2008), he also serves as a special advisor to the China India Institute. He can be contacted at agupta@rhsmith.umd.edu.

 

 

 

 

 

Back to Issue
    India’s sustained economic growth, entrepreneurial society and young population have it poised to become an economic superpower within the next 15 years, argues Professor Anil K. Gupta. With its vibrant democracy and free press, the country provides an alternative to China, if it can overcome daunting challenges. But what kind of superpower will India become?
    Published: March 2011 (Vol.6 No.1)
    About the author

    Anil K. Gupta is Michael Dingman Chair in Global Strategy and Entrepreneurship at the Smith School of Business, the University of Maryland at College Park.

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