Rise of India will be one of the big stories of Asia in the next 20 years

In this series, we asked speakers at the Milken Institute Asia Summit to make one prediction for where Asia is headed in the next 20 years. Join the conversation by writing your own article here and including #MIGlobal. Follow the Milken Institute to get updates from the Asia Summit.

?As India celebrates its 70th year of independence, I am more sanguine about its prospects than I’ve been for a number of years. In the short-term, India still has a number of headwinds it needs to wrestle through. The cyclical investment climate continues to be soft, and the banking sector is weighed down by non-performing loans. On the positive, many of the measures of the current Modi administration are a boon for the business climate, and starting to filter through.

All in, I believe India’s economy has bottomed out and will pick up pace in the next few years. As we look out further into the medium-term, I am even more bullish about India’s prospects. Indeed, I am convinced that the structural rise of India will be one of Asia’s big stories in the next 20 years, powered by a few themes:

• Consumption. Today, India is primarily a consumer-based economy with services accounting for about 65-70% of GDP. Household income is growing, as is the middle class, and this has been the main driver of India’s annual GDP growth of 7-8%. A number of structural tailwinds can be expected to further fuel India’s consumption boom. One of them is India’s growing youthful population – unlike the G3 and many Asian economies, its working age population has not peaked. Forecasts are that between 2015 and 2040, its working population will rise from 66% to 68% of total population. Second, India’s household leverage remains relatively low – household debt to GDP is at about 10%, compared to 40% for China and 60% for Singapore – so there is plenty of room for the consumer credit market to support any growing consumption appetite.
• Investment. The Modi government’s strong emphasis on manufacturing has revived what was previously a stagnant sector, and made it competitive again. India is today the sixth largest manufacturing nation in the world, from ninth place, and “Make in India” is growing in brand cache internationally. Between October 2014 and March 2016, foreign direct investments to the tune of USD 100 billion have poured into India across diverse sectors, attracted by the country’s liberal investment regime as well as more favourable business climate. A strong manufacturing sector and export competitiveness will be India’s next big driver of growth, after consumption.
• Favourable policy actions and reforms. Fiscal devolution from the centre to state governments, simplification of the tax structure, encouragement of foreign direct investment, use of e-auctions to award business contracts, promotion of digitalisation as well as implementation of social sector programmes such as financial inclusion, are examples of policy actions by the Modi government in recent years. All of them are in the right direction, and either enhance productivity, plug leakages, improve transparency or directly bolster the economy. While in the short-term, the impact may not be that visible, these measures will have significant long-term impact.

Taken together, India’s consumption boom, investment and export drive, as well positive policy actions should enable the economy to achieve sustainable growth of 8-10% over the next couple of decades.

There are a couple of things to be watchful of, though. The first is that unless carefully harnessed, India’s growing youthful population could turn out to be not a demographic dividend but a demographic disaster. Whether it is one or the other turns on India’s ability to ramp up jobs creation by some 15-20 million a year, as well as provide meaningful skills training for this expanding workforce. Growth in manufacturing, as well as the SME and startup sector will help in some of the labour absorption. Modi has also set a target of training about 400 million people by 2022. Skills development is an area of cooperation between Singapore and India, and Singapore’s Institute of Technical Education has agreed to help set up three centres in the area of tourism skills development. Two – in Delhi and Udaipur – are already running and a third is being planned in Assam.

Another potential fly in the ointment is India’s banking system which is enmeshed in non-performing loans. Unlike some other governments, the Indian government does not have the fiscal capacity to take the write-offs and recapitalise the banks in one shot, so recovery of the sector is likely to be somewhat protracted. This means availability of capital to fund economic growth in the near-term remains constrained.

While these are not small challenges, I am optimistic about India’s future. The long-term structural trends, coupled with the ease-of-doing-business measures being implemented, are powerful forces that should enable India to be one of Asia’s biggest stories.