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India Per Capita Income Lags Despite Strong Growth, Says Goldman Sachs

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India may continue to stake claim to being among the fastest growing major economies, but even at these growth rates it will take the economy years to catch up with other countries in terms of per capita income.

While India’s per capita income has grown at a steady pace over the past four decades, it remains much lower than other emerging economies, said Goldman Sachs’ economists in a report released on Monday. The per capita income of economies like Indonesia, South Africa, China, Mexico and Brazil is many times that of India, said economists Prachi Mishra, Vishal Vaibhaw and Andrew Tilton.

Indonesia, which is often considered the closest comparable economy to India, has a per capita income twice that of India. China, whose growth rates are often compared to India, has a per capita income 4.4 times that of India.

Goldman Sachs’ models suggest that it could take India many years to catch up with other emerging economies. If India continues to grow its per capita income at the current rates, it would still take the economy 35 years to catch up with Indonesia. To catch up with the U.S. would take 56 years, estimated the research house.

"India will have to lift its growth path to catch up in the process of convergence with other emerging economies." - Goldman Sachs, India 2019 Outlook

The investment bank projects this scenario despite an expected pick-up in potential growth. Goldman expects to see a jump in potential growth from 7.1 percent in the FY10-FY18 period to 7.7 percent between FY19-FY23.

Potential growth represents the growth rates which an economy can sustain without sparking imbalances like high inflation or a widening current account deficit.

Softer Momentum but Strong Growth

While longer term challenges remain, Goldman expects the Indian economy to show strong growth in the near term.

For the current financial year, the investment bank has revised its growth forecast to 7.3 percent from 7.7 percent in FY19. In FY20, growth is likely to strengthen to 7.6 percent. However, the research house has had to pare down its growth estimates for both years as some of the perceived positive triggers have not materialised as expected.

"The assumed positive effects of public sector bank recapitalisation has not materialised so far and the implementation of the GST is running into short term bottlenecks." - Goldman Sachs, India 2019 Outlook 

The report also noted that the liquidity strains being faced by Non-Banking Financial Companies could add a downside risk of 12 to 21 basis points to growth in FY19.

Rate Hikes To Resume In 2019?

Goldman Sachs forecasts consumer inflation at 4.3 percent in FY19 and 5.1 percent in FY20. Inflation will rise as the favourable base effect begins to wane. Higher agricultural support prices and a pick-up in rural wages could also lead to a resurgence in food price inflation.

Food disinflation may most likely be the result of a decline in rural wage growth, lower rate of increase in minimum support prices (MSP) and a collapse in the wholesale price of vegetables. These factors may be transient and could reverse with a change in economic conditions, said Goldman.

Given its inflation outlook, Goldman economists expect three rate hikes of 25 basis points each in the second, third and fourth quarter of the next financial year.This is contrary to the majority expectation of an extended pause in interest rates.

Along with higher inflation expectations, Increasing policy rates in the U.S., a positive inflation gap and a positive output gap domestically may lead to higher rates in 2019, the economists explained.

. Read more on Business News by BloombergQuint.