Demographics is (almost) destiny in more ways than one, and it would be silly to linearly extrapolate the past without taking cognisance of the above. To wrap up the 8.8 per cent GDP growth assumption, let us move from labour quantity to quality. Yes, the education system in India leaves a lot to be desired but it is also starting from a very low base. In the interest of brevity, we can note that the above-mentioned cohort (that would start working from 2020 in India) is also likely to have near-universal literacy albeit still shoddy education. Moreover, again by 2020, a vast majority of them would have 4G smartphones, and within a few further years, 5G access as well (which would further enable AR/VR and other technologies as well). E-commerce, fin-tech and perhaps more crucially, ed-tech are all likely to be massive sectors. Opportunities will be created where we cannot even imagine today. To quote Adam Smith, the division of labour (and hence productivity) is only limited by the extent of the market. And the market extent in India is going to go from “my village” to the “whole world” for hundreds of millions in the coming years. Moreover, the big push to physical infrastructure (expressways, etc) and the overall formalisation push of Modinomics is likely to further help.

On the second assumption of the rupee appreciating in real terms (not nominally) against the dollar by around 2 per cent annually for the next 10-15 years, one would have to get into the technical nuances of Balassa-Samuelson effect (Raghuram Rajan also hits on one aspect of it in this short video). To put it very simplistically – as a country becomes relatively richer (compared to the world/the frontier economy/its trading partners), its tradable inflation, often of goods, is generally less than its non-tradable inflation, often of services.

Because of that trend, a country’s GDP PPP multiplier decreases, multiplier here referring to how many times the PPP GDP is larger than the market exchange rates’ one. For India, right now the multiplier is at 3.5-4x and for China it is ~2x. But keep in mind that these multipliers are very hard to measure – and the said multiplier can look very different in Mumbai vs Gorakhpur (or in Beijing vs rural Tibet). Also, every now and then these multipliers are re-calculated, so do take them with a pinch of salt. Nonetheless, they are directionally useful.

So even if Indian incomes grow almost as fast – not necessarily as fast or faster – as Chinese ones did in the last decade, even a 2 per cent annualised up move in the REER for 10-15 years is a conservative assumption (as it will move the Indian multiplier to levels still much higher than the current Chinese multiplier). The point to keep in mind is that just growing does not allow an emerging economy to have appreciating REER – you must grow faster and faster sustainably compared to the rest of the relevant world. For example, Indian incomes today are still as a market exchange fraction of US incomes at the same levels we were 50 years ago! (One can only gawk at such a massive human tragedy – the sheer opportunity cost of it all – but that is for another day perhaps; the relevant point for this piece is that we are perhaps finally out of the woods, though of course the never-ending work of reform remains.)