This is my take on Goldman sachs' Paper "India's Rising Growth Potential"

What Goldman Sachs says-

Goldman Sachs Global Economics Paper No: 152
India's Rising Growth Potential

Refer to: ==
http://www.usindiafriendship. net/viewpoints1/Indias_Rising_ Growth_Potential.pdf

"India's high growth rate since 2003 represents a structural increase rather than simply a cyclical upturn. We project India's potential or sustainable growth rate at about 8% until 2020.

The recent growth spurt was achieved primarily through a surge in productivity, which we believe can be sustained.

India is well-positioned to reap the benefits of favorable demographics, including an `urbanization bonus', and a further rise in capital accumulation, in part from an upsurge in foreign direct investment.

The risks to growth are: political risk, including a rise in protectionism; supply-side constraints, including business climate, education, and labor market reforms; and environmental degradation.

Our assessment suggests that India's influence on the world economy will be bigger and quicker than implied in our previously published BRICs research."

My Take-:

I disagree on most of the assumptions here. My reply to it is as follows:

This is an interesting article and a kind of morale booster for every Indian which says that India GDP will surpass that of US before 2050. I believe that this is based on optimistic assumptions.

We must consider the role of global scenario in GDP growth of India. This is the time when its not only India but all the world is growing rapidly. Now world GDP growth highest in its history. Its not only Indian stock market but stock markets of almost all the developing and developed countries are at all time high. This is because of easy liquidity on the account of current account deficit of US of about 800bn $. I really don't think that this party can last as long as 2020. It is therefore difficult to believe that India will achieve growth rate of 10% by 2010 and sustain it. Interestingly, Goldman Sach predicts that India will continue to have huge Current Account Deficit till 2020, of the order of 10% of GDP up from current less than 5% inspite of assumed increase in productivity. ( Imagine how big it will be if we continue to grow by more than 8%, which is what they assume). Its really difficult to imagine that India will continue to have such a huge FII and FDI inflows to match its Balance of Payment and still manage to grow at such a rapid pace.

It is also assumed that the labor will move from less productive agriculture sector to more productive industry/ services but I believe that it is almost impossible to have such movement unless we have some kind of training. We can, at the most, say that there is no addition of labor in agriculture and all the new labor is accommodated in Industry and Services. It is also assumed that unemployment rate will remain constant (at about 4.4%) of which I am a bit skeptical as the no. of people employed in IT, which is supposed to be one of the biggest employer, is less than 2 million. We expect to have more than 100 million of new workforce to be added by 2020. Unless we have substantial overhaul of our educational system and make it more industry focussed, it will be difficult to leverage this advantage.

Another important issue is Urban infrastructure. A lot is said about "India’s urban century" and "urbanization bonus" in this article but if we don't have the infrastructure to support it, it will be an opportunity lost. I believe that putting a cap on SEZ size is a step backwards. Govt. should put a cap on min size of 5000 acres rather than max size of 5000 acres. As smaller SEZs will not create substantial infrastructure which is the very purpose of SEZs and tax breaks given to it. The biggest and the most successful SEZ in China is more than a few hundred square kms in size.

There is one important statement:
"However, there are considerable risks that India will not be able to achieve ‘inclusive growth’ without sacrificing average growth rates"
And politicians in India are doing just that(I don't think that this is bad thing to do). We can clearly see it from our monetary policy, that focus of govt is to control prices even if it slows down industry. A lot of populist measures are taken which can hurt economy. It will be really difficult for any govt to implement labor reforms which are quite essential for growth of manufacturing.

Looking at this articles one might feel that I am overly pessimist about India's growth story, but that is not the case. All the strong points of India's growth are well documented in this paper and I agree with most of them but I just want to highlight that its not all green signals for India. We need to overcome a lot of hurdles.