Larry Summers: India Can Achieve An Impressive Eightfold Expansion By 2050, With An Annual Growth Rate of 8%; Has China’s Economic Challenges Paved The Way For India?

Former United States Treasury Secretary Larry Summers has articulated a bold vision for India’s economic potential; he believes that India has the capability to achieve an impressive eightfold expansion by 2050, with an annual growth rate of 8%.

This perspective comes at a time when India’s GDP has already exhibited robust growth, reaching 7.2% in FY23, with an anticipated 6.5% growth rate for the current fiscal year, as estimated by the Reserve Bank of India and these figures are notable, especially in a global economic landscape marked by sluggish growth.

Summers shared his insights during a lecture organized by the Finance Ministry and the Confederation of Indian Industry in New Delhi.

He, however, emphasized that realizing this ambitious growth target hinges on several critical factors, including the implementation of reforms in certain states, addressing the infrastructure requirements related to energy, and enhancing the efficiency of the public sector.

He described that while his estimation is a stretched one yet, for India, it is an achievable goal. Likewise, Summers stressed that this eightfold expansion would have a transformative impact and could serve as a guiding objective for India in the 21st century.

It is worth noting that Summers, in collaboration with N. K. Singh, the chairperson of India’s 15th Finance Commission, co-chaired an expert committee report on Multilateral Development Bank (MDB) reform as part of India’s G20 Presidency.

The initial part of the report advocates for a triple mandate and aims to increase sustainable lending levels by 2030 while establishing a third funding mechanism to engage with investors willing to support the MDB agenda.

The second part of this report is expected to be submitted and discussed at the upcoming G20 finance ministers and central bank governors’ meeting in October under India’s presidency.

Addressing concerns about the impact of higher interest rates on economic growth, Summers fielded questions from the audience; he expressed his belief that a prolonged period of higher interest rates is unlikely to serve as a significant impediment to economic growth, although he did express some concerns about such a scenario.

He clarified that he does not anticipate such a development, but if monetary policies were to be pursued in a way that failed to support growth, it would be a cause for worry.

China’s Economic Impediments And India’s Luck
Experts are of the opinion that the Chinese economy is grappling with multiple challenges, potentially prompting foreign institutional investors (FIIs) to divert their attention to other emerging markets, notably India.

The Shanghai Composite Index has shown little movement this year and, given the deteriorating economic conditions, offers limited prospects for growth in the near future.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, has pointed out that the Shanghai Composite Index is currently the worst-performing major market when considering both short-term and long-term perspectives. Over the last 16 years, the index has remained stagnant, currently standing at 3,126, the same level as in March 2007, which he considers a concerning long-term performance.

Vijayakumar believes that disappointment with China is on the rise, which could be advantageous for India.

He suggests that the Chinese market’s prospects appear dim as China grapples with a declining population, a slowing economy, geopolitical tensions, and unfavourable economic policies. Therefore, foreign portfolio investors (FPIs) are increasingly adopting an “avoid China” strategy, potentially benefiting India.

Perhaps this change in outlook may prove to be beneficial for India, as we have already seen in the case of Apple, Foxconn and even Tesla to some extent.

Manish Chowdhury, Head of Research at StoxBox, concurs with this view, highlighting China’s struggles on various fronts, including a downturn in the property market, slowing economic growth, export challenges due to supply chain diversification efforts by Western nations, high leverage in the banking system, and weak domestic demand.

From India’s perspective, Chowdhury identifies two factors that could attract FPI inflows: the potential for India’s nominal GDP growth of 12%, driven by strong consumption, demographics, corporate balance sheets, and proactive policy measures, and ongoing efforts to create an attractive investment environment through manufacturing development, economic reforms, improved ease of doing business, and stable governance.

Shrey Jain, Founder and CEO of SAS Online, notes that despite some stability in manufacturing and related investments in August, the ongoing decline in property investment remains a significant drag on Chinese economic growth and Beijing may need to implement more aggressive measures in the property sector to boost growth.

Further, negative news, low sentiment, and geopolitical uncertainties are deterring foreign investors from China.

India’s announcement of the India-Middle East-Europe Economic Corridor (IMEC) is seen as a response to China’s Belt and Road Initiative (BRI) and could boost FPI confidence in India, potentially attracting long-term investments.

China’s substantial investments in infrastructure and a weakening property market have placed the country under significant debt pressure, with about 70% of household wealth tied to property, coupled with weak demand and youth unemployment, all present challenges for sustained growth.

India, on the other hand, has strengthened its international relations and is perceived as a favourable investment destination, particularly in semiconductors, new-gen technologies, and infrastructure, making it an attractive choice for FPIs.

Abhishek Jain, Head of Research at Arihant Capital, suggests that while regulatory issues and geopolitical tensions have made some investors cautious about the Chinese market, certain sectors in China still hold potential. Still, the situation in China may prompt global investors to explore alternatives like Hong Kong or select US companies, potentially leading to a shift in allocation away from China to these regions.

The Last Bit, As China faces hurdles on multiple fronts, including a property market slump, slowing growth, and geopolitical uncertainties, FIIs are increasingly adopting an “avoid China” strategy and turning their attention to India.

On the other hand, India’s strong growth potential, driven by consumption, demographics, robust corporate balance sheets, and proactive policy measures, makes it a compelling choice for long-term investments.

While India still needs to confront challenges like high valuations, rising bond yields, inflation, and more, former United States Treasury Secretary Larry Summers’s bold vision for India’s economic potential could be viable.