A Fitch Ratings report on the ‘Medium-Term Growth Potential in Emerging Economies’ says India has the highest potential gross domestic product (GDP) growth rate of 6.7% per annum over the next five years among the 10 major economies studied.
That may not be music to Indian ears, considering the disappointment that has greeted the Central Statistics Office’s estimate that real GDP growth will be 6.5% this fiscal.
The chart below shows the supply-side drivers of growth.
The real push to GDP growth is expected to come from an improvement in total factor productivity (TFP), thanks to the recent structural reforms such as the introduction of the goods and services tax (GST). The pick-up in labour productivity in recent years has been almost entirely due to capital deepening, and Fitch says that is about to change.
Says the report: “Potential GDP should continue to be bolstered by a fast-rising working age population (whose growth is set to slow only marginally) and good labour productivity gains. We expect a sharp pick up in trend TFP growth, as the reforms carried out by the government (such as the implementation of the goods and services tax) should start to bear fruit, spurring more efficiency in the productive process.”.