Hong Kong: Say hello to the world’s next miracle economy: India. The nation has what it takes to push past China as the region’s economic powerhouse, according to its former central bank governor.

India’s young workforce gives it an advantage over aging China and its democratic political system will save it the upheaval that probably awaits its larger rival, D. Subbarao said in an interview at a Credit Suisse conference in Hong Kong.

When Subbarao’s term ended in September 2013, India’s currency was at a record low, growth was slowing and investors were fleeing. The election of the nation’s most stable government in 30 years, improving public finances and easing inflation as oil prices fall has set the stage for an economic lift-off, he said.

“India can become a growth miracle of the 2020s," said Subbarao, who was succeeded at the Reserve Bank of India (RBI) by Raghuram Rajan. “If you had the Japanese miracle, the East Asian miracle, the Chinese miracle, an Indian miracle is a tantalizing prospect and quite possible."

All the nations Subbarao mentioned rose to power and prominence due to export-driven manufacturing growth. India will have the world’s largest labor force by 2030, according to projections from the United Nations, positioning it to boost factory output.

China’s pool of workers aged between 15 and 59 is seen shrinking by 61 million during the same period. That’s about the equivalent of losing the combined working populations of the UK and France.

Picking the baton

Demographics will compel China to move up the value chain and raise wages, allowing India to pick up the slack, Subbarao predicted. The view is shared by David Mann, head of Asian macro research at Standard Chartered Plc, and India’s finance minister Arun Jaitley, who said on Wednesday that interest is shifting to India due to high labour costs in China.

“We could see India take on the baton in the coming three to five years," Singapore-based Mann said in e-mailed remarks.

They aren’t alone in their optimism for India. The International Monetary Fund (IMF) forecasts that India is poised to be the fastest-growing major economy as China slows, and the Asian Development Bank said on Tuesday that India’s efforts to remove entrenched bottlenecks will boost growth to 8.2% in the fiscal year through March 2016.

Outpacing China

That would be faster than China, which is forecast to expand by about 7% percent in 2015 or the slowest pace since 1990. The projection is in line with the Indian government’s forecast, although that’s based on data that has puzzled policy makers including Rajan, who cut interest rates twice this year citing economic weakness.

Rajan also said India mustn’t focus on export-led growth as global demand slows. He’s bulked up the nation’s foreign exchange reserves, overseen the rupee’s advance as one of Asia’s best performers this year and convinced the government to adopt a formal inflation target.

While Subbarao had dismissed inflation targeting during his time as central bank chief, he clashed with former finance minister P. Chidambaram, who called for RBI to lower interest rates to support growth.

“He has been absolutely outstanding," Subbarao said on Wednesday, referring to Rajan’s period in office so far. “I hope he will go places."

No bragging rights

Even if India does meet targets and fulfill its potential, surpassing China may not be the prize that some anticipate.

The number of Indians living on less than $1.25 a day has dropped by 16 percent between 1994-2010 while China saw a decline of 81 percent during roughly the same period, World Bank data show.

A maze of regulations and an inefficient bureaucracy is partly to blame for the lowest living standards among emerging markets, according to India’s Prime Minister Narendra Modi, who swept to power last year on a pledge to create jobs. India has fallen to 142 of 189 countries on the World Bank’s latest Ease of Doing Business Index, while China rose several notches to 90.

“We have to recognize that India growing faster than China doesn’t give us bragging rights," Subbarao said. “Because in India, as some people have said, there’s so much low hanging fruit that the tree is almost fallen to the ground." Bloomberg

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