The Elephant is on the move. For long derided for its “Hindu rate of growth”, India’s GDP growth has picked up pace over the past few years. In 2004, economists at Goldman Sachs predicted that India would emerge as one of the top three economies in the world by 2050. And in January 2007, they projected a potential growth rate of 8 per cent till 2020. Stephen S. Roach of the US-based Morgan Stanley is also upbeat about the sustained growth of the Indian economy. Roach feels that India has achieved “breakthroughs in savings and foreign direct investments that would script one of the world’s most exceptional economic development stories over the next three-five years”.

According to Roach, national savings has gone up from the 24 per cent average to 32.4 per cent (as of March 2006). Moreover, the aggregate investment ratio too has increased to 33.4 per cent and foreign direct investment is expected to reach $13 billion in the 12 months ending March 2007 – more than twice the $5.5 billion mark last year.

What accounts for the rapid growth and how sustainable is the 8 per cent GDP growth rate? According to Goldman Sachs, “a turnaround in manufacturing productivity” has been the key driver of productivity and economic growth. The liberalisation of the economy in the early 1990s and the unshackling of the private sector have led to “increased openness to trade, investment in information and communication technology and greater financial deepening”, says the Goldman Sachs report. The report adds: “The movement of surplus labour from low-productivity agriculture to high-productivity industry and services contributes 1 percentage point to annual GDP growth. Productivity in industry and services is more than four times that in agriculture which employs 60 per cent of the labour force.”

The report projects that by 2020 nearly 140 million rural dwellers will move to urban areas while a massive 700 million people will urbanise by 2050. Rural-urban migration is expected to further give a boost to productivity growth. The report however warns that policy will have to address the basic infrastructure shortfalls in order to take the “advantage of the urbanisation bonus”.

The other factor that is impacting productivity is the shift in land from agricultural use to urban use and higher productivity sectors. The creation of the special economic zones is perceived as holding the “potential of transforming the productivity of agricultural land.” In the light of the changing scenario, it is important that agricultural productivity be improved as well. As the report points out: “Higher productivity leads to more confidence and increased openness, which means more technology and investment and sustained productivity growth.”

Further, Goldman Sachs projects that India’s GDP will surpass that of the United States before 2050 to make it the second-largest economy. “India could reach a growth rate of 10 per cent by 2010 and sustain it thereafter,” if productivity growth continues to be on the upswing.

But for every growth story there are risks. “India will need continued progress in reducing the fiscal deficit and in enhancing education at all levels,” says the report. Other risk factors include the threat from protectionism, supply-side constraints to doing business and environmental degradation. Rapid growth also has its downside. “The old risk of sectarian disharmony is now supplemented with the new risk of political discontent spawned by dissatisfaction with the unequal distribution of economic growth. How effectively the political process manages these risks will be central to India’s economic performance.”