HAMISH MCRAE: UK can benefit from India’s economic takeoff

The world’s fifth-largest economy is growing at 5.4 percent annually and people here in India’s capital are worried that something has gone wrong because the Reserve Bank of India’s forecast was 7 percent.

It is an extraordinary testament to the magnitude of the country’s achievement: that the world’s most populous country is also its fastest-growing major economy, even when it hits a bump in the road.

India’s economic takeoff is a story with profound implications for its 1.44 billion inhabitants, but also for its trading partners, especially the United Kingdom.

Until you get here, you don’t realize the scale of the transformation over a generation from a relatively slow-growing economy, held back by regulation and corruption, to one that is now turning out the lights.

It is difficult to see any set of circumstances in which it will not become the third largest country in the world, after the United States and China, by 2030.

That path to number three is the topic of a conference I attend, so the idea that this will be India’s destiny is a hot topic right now.

What could hold India back and why is its success crucial for us?

It is generally easier to see the negative than the positive, and there are many of them. They include inflation: 6.2 per cent in October and well above the Reserve Bank of India’s 4 per cent target.

The RBI governor was not re-elected last week. There are concerns about corruption, governance, pollution, climate change (excessive heat was one of the most searched searches on Google this year), the general level of education and how rising wealth is not reaching the ranks. still enormous poor.

India’s middle class, estimated at 450 million, is projected to surpass 700 million by 2030. This is a huge achievement, but it still leaves India far behind China when it comes to lifting its people out of poverty. .

One of the big questions being debated here is how India will become a fully developed economy by 2047, the centenary of its independence. That will be an exaggeration.

Still, any country that records average growth of between 6 and 7 percent annually will be ahead of us laggards in the developed world. The Indian economy will overtake that of the United Kingdom in 2022, and Morgan Stanley believes it will overtake Japan and Germany in 2027.

The world’s third largest economy will also be the world’s third largest market.

There is the opportunity. There are three areas in which we can mutually benefit. First, and most obviously, is trade. India is only our eleventh trading partner. While both exports and imports have increased steadily, India accounts for only 2.4 per cent of our trade.

This does not fit with the size of the two economies. Pressure to try to reach a free trade agreement stalled last week, but talks resume in January.

The point here is that both the UK and India tend towards trade in services rather than goods.

We have a large surplus in trade in services, which partly covers our deficit in goods.

India has about 2 percent of the global goods export market, compared to 4 percent of the services market. If Donald Trump’s tariffs cause further disruption, it will be in our own mutual interest to come together to push for easing restrictions on trade in services.

Then there is the investment. We have high-profile investments, such as the Tata group’s Jaguar Land Rover, but the total stock of foreign direct investment in each country remains small.

India accounts for just over 1 per cent of our overseas investments and just 0.5 per cent of foreign investment in the UK. We need to look at why these numbers are so low and what can be done to increase them.

And finally there are people. There are an estimated 1.9 million people of Indian origin, the largest ethnic minority group, living in the UK. This is a huge potential asset. The challenge for both countries is to think creatively about how to turn that asset into something that benefits us all.