India as #1: Even Sooner than I Thought

Last year the professors at George Mason asked me for my most outrageous belief.  Initially I couldn’t think of one; I thought my views on the Fed were sufficiently outrageous.  (Of course that’s before Fed officials themselves started calling current policy “restrictive.”)  I finally ended up with a post predicting that India would have the largest economy in the world 100 years from now.  Unfortunately, events are moving so fast that this prediction no longer seems outrageous enough, and I plan to move the date much closer to the present.  But first I’d like to provide a few reasons for why I think my previous view was far too un-outrageous.

One problem was that I was merely looking at population data, not size of workforce.  Here’s some interesting info from The Economist:

India’s GDP is expected to grow by 8.5% this year, and could grow even faster. Chetan Ahya and Tanvee Gupta of Morgan Stanley, an investment bank, predict that India’s growth will start to outpace China’s within three to five years. China will rumble along at 8% rather than double digits; India will rack up successive years of 9-10%. For the next 20-25 years, India will grow faster than any other large country, they expect. Other long-range forecasters paint a similar picture.

Let’s assume that by 2050 India has 1.5 billion people and China has 1.3 billion (I think these are fairly close to the consensus.)  Then because a much larger share of India’s population will be of working age, it will have 25% more potential workers (1 billion vs. 800 million.)

Furthermore, I read somewhere else that China’s population may fall to 750 million in 100 years.  This is due to the fact that China is rapidly becoming richer, and birthrates in all other rich East Asian countries are barely more than one child per family.  I see no reason why China will be different.

Let’s assume India’s population levels off at 1.5 billion (or more likely grows a bit after 2050, and then later shrinks a bit.)  That means it will have twice China’s population in 100 years.  Furthermore, China’s demographics will look much more like an inverted pyramid, meaning that China might only have 40% of India’s working age population, not the 80% predicted for 2050.  India will probably be a developed economy by 2110, and almost all developed economies have relative similar per capita GDPs.  I can’t imagine India’s productivity still being only 40% of China’s at that time.  As The Economist indicated, India will soon be growing faster than China, and when China hits the middle income wall that Korea and Taiwan hit in the 1990s, its growth will slow sharply.

I apologize for the previous prediction that it would take India 100 years to catch up to China, I was assuming much more similar workforces.  So if I am going to continue calling this prediction “outrageous, I need to at least keep a step ahead of the ultra-respectable Economist magazine.  So here’s the new prediction:

Year:  2081

Workforce ratio:  China will have 60% of India’s workforce.

Productivity ratio:  India will have 60% of China’s worker productivity.

GDP ratio:  1:1

Fortunately, I won’t be alive then to be mocked for my prediction.  Poor Lester Thurow and Robert Fogel may not avoid that ignominious fate.  Ultra-pessimistic Thurow says it will take China at least 100 years to catch up to the US in GDP (actually they are just 5 to 7 years away in PPP terms.)  And ultra-optimistic Fogel says China will have twice the EU’s per capita GDP by 2040.  Twice!?!?  Fogel’s a great economist, but I wouldn’t say that forecasting GDP is his strong suit.

• Become A Funded Futures Trader