Home > GDP Growth, Indian Economy, Indian GDP > India 2020 or India 2040?

India 2020 or India 2040?

Today’s ET has a chart on how India’s GDP has evolved post Independence. As you can see we have moved from a primarily Agrarian economy to a mainly Service oriented economy.

It is no wonder then that some of the biggest successes over the last decade have been companies in the IT/ITeS sector and other service sectors like BFSI, Retail and Telecom. The graph below shows how the share of services sector has expanded compared to the contraction in the Agriculture sector. It is a disturbing trend that the share of Agriculture as a % of GDP is dwindling given that it employs 60% of India’s population (directly or indirectly).


I was browsing through the GDP composition of some of the developed nations like US, Japan, UK, Taiwan and Germany. I noticed something very interesting in the composition of the economies.

All the developed countries have Agriculture as % of GDP at less than 2%.

Also the share of Industry varies between 22% – 28% and share of Services varies between 71-77% uniformly for these 5 economies irrespective of the path of growth chosen. Let us see how some of them have evolved till date.

1. US Economy – If we look at the US economy, it rose to prominence post World War II as an engineering goods, defense goods and automobile exporter. Later on the growth in hi-tech sectors like pharmaceuticals, semiconductors, telecom and IT made it the largest economy in the world. With increase in consumer consumption, sectors like retail and financial services increases many fold from 1970’s to 2008. This period saw New York emerge as the financial capital of the world. Also the US moved from a net exporter to a big net importer as of date. Simultaneously the savings rate in US has moved into negative territory over the last few decades. Capitalism and free enterprise is the most common reason quoted for the phenomenal rise of the US economy.

2. Japanese Economy – Japan on the other hand started with low cost exports in the post World War II period. The nation built its fortunes by exporting everything from cars, bikes to electronic goods to high-end engineering goods. The late 80’s in Japan saw a huge bubble in real estate and the stock market. The economy is characterized by high levels of domestic savings and over the last 2 decades, government spending has remained very high and bond markets dominate the financial landscape in Japan. The country still remains a net exporter in spite of the continuous appreciation of the Yen against most currencies including the USD.

3. UK Economy – The Industrial Revolution originated in UK in the late 1800’s. The economy of UK was characterized by Steel Mills, Textile Mills & Auto manufacturing in the middle of the 19th century. However, over the years UK has also changed into a Service driven economy and most of the manufacturing has moved to either Eastern Europe or East Asia. London emerged as the financial center of Europe competing with New York at a global stage. UK also witnessed a housing bubble and elevated levels of both public and private debt in the last decade. The UK is known for protectionism of smaller industries and various sops are given to these industries to enable them to compete against low cost nations.

4. German Economy – There is some similarity between the economies of Japan and Germany. Germany is the export power house of Europe exporting everything from high tech engineering goods, luxury vehicles to speciality chemicals. It has the highest per capita exports in the world. Rather than creating huge enterprises, the heart of the German economy is the Mittelstand (or German SME companies). They employ up to 70% of employees in private businesses and export up to 80% of their produce. Given their size they rely more on local banks than on Capital markets for funding their growth. The German government gives them sops and subsidies to allow these SME’s to compete against low wage countries of Eastern Europe and Asia.

5. Taiwanese Economy – Taiwan has a dynamic capitalist economy with guidance of investment and foreign trade by the Republic of China (ROC) government which governs Taiwan.  Taiwan is also highly export oriented and has the largest semiconductor facility in the world. Export composition has changed from predominantly agricultural commodities to industrial goods (now 98%). The electronics sector is Taiwan’s most important industrial export sector and around 70% of all semiconductor chips pass through Taiwan.

The point I am trying to make here is that all these economies are structured differently yet their GDP structure looks strangely similar.The chart shows how there is an uncanny similarity in the sectoral composition of these economies irrespective of the level of liberalization, time since liberalization, government regulation, domestic savings rate, exports growth, gross capital formation, demographics, development of capital markets etc. This is really strange as all these countries have vastly different underlying economies.

Also GDP = Consumption + Investment + Government Expenditure + Net Exports

The US and UK depend on Consumption and Government Expenditure for growth while Taiwan, Japan & Germany depend on Exports and Investment for growth.  Yet their sectoral composition remains puzzlingly same.

This raises a question that will India eventually have Agriculture as a % of GDP at less than 2%? Is this the defacto structure once an economy is fully developed?

If we assume that this would be the sectoral composition for any developed country then what would the GDP of India look like once it is fully developed?

For convenience sake let us assume that Agriculture will remain almost the same size going forward. Various reasons like lack of irrigation network, dwindling ground water levels, reduced area under cultivation and excessive use of pesticides and fertilizers can justify this argument.

The Indian economy is currently  $ 1.25 Trillion so the size of Agriculture sector is $ 212.5 Bn. If Agriculture were to stay the same size and be 2 % of the GDP, then the size of the Indian Economy would have to be $ 10.62 Trillion!!!

That means that Indian GDP would have to grow at 8.5 times its current size for this to be achieved. Let us assume that Industry as a % of GDP is at 27% and Services at 71% (average size based on sample of 6 developed economies). Then the overall picture would look something like this.

Now let us try to estimate when this may happen. Assuming a realistic GDP growth of 7% (given that the growth will decelerate going forward due to higher base effect), it would still take around 32 years for our economy to cross the $ 10 Trillion mark. So, India in 2042 could be a fully developed economy.

We are mostly going to miss the vision of being a developed country as per India: 2020 but maybe India: 2040 can be a more realistic target.

Note:- Maybe India will never have Agriculture as a share of GDP at 1 or 2% as the crop yields in India are low and average land size is small (so mechanization is not cost effective). Most of the developed countries use high degree of mechanization & technology in farming and hence it is possible for a small section of population to feed the entire country. In India however, 60% of the population is linked either directly or indirectly to Agriculture. The idea of the article was just to imagine a “What If” scenario and its possible implications.

The growth or decline of Agriculture over the coming decades can be debated but one thing is certain.  “Services” will continue to be a bigger and bigger portion of the GDP.

A 1.2 Bn+ population will need more and more of services like Telecom, Financial Services, Retail, Hospitality, Healthcare and Education. That space should grow well due to favourable demographics in the years to come.

  1. Pratik
    August 30, 2010 at 7:22 am

    salilnomics !!! nice 1…

  2. Mohinee
    September 22, 2010 at 3:18 am

    Very well written. Specially liked the way you arrived at $10 trillion economy keeping % of agriculture to GDP constant.

    I think, since service sector in future is going to predominantly drive the economy, we should aim at researching new sectors (casino,gaming,leisure etc) within the service industry which hold the potential to make it big in future.

    This is not linked to above article but would it be worthwhile to show some analysis on how the stocks with PE/VC investements have fared as compared to the ones without any such investemnt?

    • September 22, 2010 at 4:30 am

      Thanks a lot.

      BTW if we look at the IPO market over the last couple of years, we are getting companies with interesting service oriented business models raising capital.

      Eg: 1. SKS Micro Fin – First major MFI to list
      2. Jubilant Foodworks – Major fast food chain
      3. Talwalkars – First fitness chain (Marico owns the “Kaya Skin Clinic” brand but it is not independently listed)
      4. Career Point – First tutorial center
      5. Eros International – Movie Distribution
      6. OnMobile Global – Mobile Value Added Services
      7. DQ Entertainment – Gaming & Animation
      8. Cox & Kings – Global Tour Operator
      9. Infoedge Ent – Online Job/matrimony/home search services

      This shows that many emerging service sector ideas are now getting listed.

      Apart from that the only listed play in Casinos is Delta Corp where Rakesh Jhunjhunwala bought a stake couple of days back…

      Will check if i have some reports on performance of PE/VC backed IPO’s vs non PE/VC backed…

  3. Mohinee
    September 23, 2010 at 7:45 am

    Agreed,it is worth keeping an eye on Delta corp.It is overvalued currently but worht picking up for long-term but only if it falls till Rs.5o-60 level.

    Regarding PE/VC investments, I was thinking, we could collect the data such as price,EPS and other valuation ratios such as PE,EV,EBITDA etc.for past 5-7 years and then check if the infusion of capital made any impact on earnings and whether it translated into higher price.

    Something on those lines. Will try to collate such data. Based on the past trends then we could try to predict the trends in future.

  4. bharath
    February 12, 2012 at 6:17 am

    worst analysis…. the india’s gdp in 2001 is 400 billion dollars and by 2011 the gdp is 1.20 trillion dollars with 5% gdp growth during thhe period the gdp tripled…and the estimates are that india gdp growth will be 7% from 2010 to 2020 then gdp will be tripled to 3.75 trillion dollars and if you calculate it till 2042 it would be 45 trillion dollars….

  5. 7 sister out of india
    October 8, 2012 at 3:54 pm

    Malaysia in 2020
    Indonesia in 2025

    India ??
    Maybe in 2045

    2012 = Poverty in india abt 421 Million
    highest
    Bihar = 80%
    lowest
    kerala = 16%

  1. August 31, 2010 at 12:43 pm

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