INDIA’S PROSPECTS WILL SHAPE THE GLOBAL GDP

At the start of a new decade, many commentators are understandably focused on the health of the global economy. GDP growth this decade most likely will be lower than during the teens.

Average annual growth of 3.5% for 2010-2019 means that many countries fell short of their potential. In principle, global GDP could have increased by more than 4%, judging by the two key drivers of growth: The size of the workforce and productivity. In fact, the 2010s could have been the strongest decade of the first half of this century. But it didn’t turn out that way.

The prospects for the coming decades are not as strong. True, some countries and regions that underperformed could now catch up; but much will depend on the realisation of several positive developments.

For example, given the European Union’s demographics, it would take a significant improvement in productivity to boost the rate of GDP growth. More expansionary fiscal policies in many countries could produce a temporary acceleration this year and perhaps through 2021. But it is hard to see how a stimulus-driven expansion could be sustained much beyond that point.

As for Brazil and Russia, it would be highly disappointing if both countries were to register the same weak growth of the past decade. Yet, to get from around 1% annual growth to 3.5-4% annual growth would probably require another commodity-price boom, in addition to major productivity enhancements. It is doubtful that either will reach its potential this decade (though, if one had to bet, Brazil has a better chance than Russia).

In China, a further deceleration in trend GDP growth is highly likely, owing to demographic realities. When I offered my earlier assessment of the BRICs (Brazil, Russia, India, and China) at the start of this century, it was already clear that by the end of the 2010s, China would be feeling the growth-constraining effects of a peaking workforce. I estimated that its real (inflation-adjusted) annual GDP growth in the 2020s would be around 4.5-5.5%. To achieve growth above that would require a significant increase in productivity. In light of China’s investments in technology and shift to more domestic consumption, productivity could improve. But whether that will be enough to overcome China’s other challenges remains to be seen.

Then there is the United States (US), where annual growth potential appears to be just over 2%. Without more fiscal stimulus and an indefinite continuation of ultra-easy monetary policies, it is difficult to see how the US could exceed this rate. Were another recession to happen in the years ahead, its prospects of reaching its growth potential for the 2020s would be smaller .

It is India that promises to have the largest influence in the 2020s and beyond. The country’s demographics will remain in an economic sweet spot for at least another decade. Were the Indian government to adopt the right mix of growth-enhancing reforms, it could easily achieve annual growth in the range of 8-10%. The problem, of course, is that the current government has shown no indication that it will pursue positive reforms. On the contrary, it has launched a debilitating new culture war.

That leaves Africa. As matters stand, no African economy is large enough to influence global GDP on its own. But, as a region, Africa’s GDP is close to that of India, which means that if enough of its major economies can achieve strong growth, the effects will be felt more broadly. The rise of Africa seems both desirable and inevitable.