India Can Grow at 10% for a Decade

Lehman Brothers Report October 2007

.India could grow at 10% or so per annum over the coming decade.


. This judgement is contingent on India continuing to actively pursue structural economic reforms.


. Structural changes behind India’s growth acceleration, contributing to capital deepening and rising productivity. They include the development of the financial system, trade and capital account liberalisation, and more prudent macro management.


. India has reached “take-off” stage.

. There is clear evidence that India’s rapid economic development, high growth and
reforms have started to interact positively with each other – the economy appears to
be taking on many of the characteristics exhibited by other large Asian economies during the early stages of economic take-off.

• While business continues to prove impressively adept at working round systemic
and structural challenges, sustaining higher growth in the medium term will require
continuing structural reform.

. further financial sector reforms could add 1 to 1½ percentage points to India’s long-term GDP growth.

• Even larger economic gains could flow from removing constraints such as weak
(soft and hard) infrastructure, bureaucracy, and labour market rigidities. Breaking
down these barriers is key to enabling business to achieve increasing returns to scale by capitalising on its global comparative advantages in labour-intensive
manufactured and agricultural exports.

. India’s trade-to-GDP ratio could double over the coming decade, also adding 1½ points to GDP growth.

• However, pushing through structural reform will remain a political challenge in the
face of headwinds from vested interest and coalition politics. That said, there should be a new window for reform after the next general election due in 2009.

• Given the powerful trends of demography and urbanisation, India needs “a faster
and a more inclusive” growth strategy to correct its inter- and intra-regional
imbalances and avoid social unrest. The social and economic costs of not pursuing
inclusive growth are potentially enormous.

• Inclusive growth can be facilitated by further easing the shackles on business, by
making education and health available to all of society and by developing the rural
sector, which employs nearly 60% of the total workforce. Labour market reforms to
spur the necessary job creation over the next decade will be a key challenge.

• India’s growing economic clout is encouraging a more proactive regional policy and
greater engagement on the global stage, for example in trade liberalisation and the
climate change debate, which also stand to boost economic growth.

• In short, in India there is still much growth potential to be unlocked.


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