Indian economy

India May Overtake Japan And Germany As The World's Third Largest Economy By 2030

The Indian economy is slated to become the third largest in the world, surpassing Japan and Germany by 2030, according to the latest S&P Global and Morgan Stanley forecast. 

S&P’s projections are based on the assumption that India’s annual nominal GDP growth rate will average 6.3% until 2030. According to Morgan Stanley, India’s GDP will double by 2031 compared to current levels.

“India has the conditions in place for an economic boom fueled by offshoring, investment in manufacturing, the energy transition, and the country’s advanced digital infrastructure,” Morgan Stanley analysts led by Ridham Desai and Girish Acchipalia wrote in the report.

“These drivers will make India the world’s third-largest economy and stock market before the end of the decade.”

The year-on-year growth rate in India for the July-September quarter was 6.3%, marginally greater than the 6.2% projected by economists earlier in a Reuters survey. Before this latest growth figure, India saw a 13.5% increase from April to June compared to last year, boosted by strong domestic demand in the country’s service sector.

According to Refinitiv data, the country experienced a year-on-year growth rate of 20.1% in the three months ending June 2021.

“These drivers will make [India] the world’s third-largest economy and stock market before the end of the decade,” the S&P report said. 

Morgan Stanley and S&P anticipate that India’s trade and financial liberalization, labor market reform, infrastructure, and human capital investment will continue. 

“This is a reasonable expectation from India, which has a lot to ‘catch up in terms of economic growth and per capita income,” Dhiraj Nim, an economist from Australia and New Zealand Banking Group Research, said.

According to Nim, some of the government reforms mentioned above have already begun. Zim also emphasized the government’s pledge to include more capital expenditure in the country’s annual budget.

According to S&P analysts, India’s government is focused on becoming a hub for foreign investors and a manufacturing powerhouse, with the Production Linked Incentive Scheme as the primary vehicle for doing so.

The PLIS, which went into effect in 2020, offers tax breaks and license clearances to both domestic and foreign investors, among other things.

“It is very likely that the government is banking on PLIS as a tool to make the Indian economy more export-driven and more inter-linked in global supply chains,” S&P analysts wrote.

Based on the same assumptions, Morgan Stanley predicts that Indian manufacturing’s GDP share will “rise from 15.6% to 21% by 2031,” implying that manufacturing revenue could triple from $447 billion to around $1,490 billion.

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“Multinationals are more optimistic than ever about investing in India … and the government is encouraging investment by building infrastructure and supplying land for factories,” Morgan Stanley said.

“India’s advantages [include] abundant, low-cost labor, the low cost of manufacturing, openness to investment, business-friendly policies, and a young demographic with a strong penchant for consumption,” said Sumedha Dasgupta, a senior analyst from the Economist Intelligence Unit.

These factors, according to her, make India an attractive proposition for establishing manufacturing hubs until the end of the decade.

A prolonged global recession would pose a significant challenge to Morgan Stanley’s forecast, as India is a trade-dependent economy that exports nearly 20% of its output.

A lack of skilled labor, adverse geopolitical events, and policy errors caused by voting for a “weaker government” are among the other risk factors cited by the US investment bank.

According to India’s finance ministry, a global slowdown may dampen India’s export business outlook.

Even though India’s GDP has already surpassed pre-Covid levels, future growth will be “much weaker” than in previous quarters, according to Sonal Varma, the chief economist at Nomura.

“Real GDP is now 8% above pre-Covid levels in growth rate terms … but in terms of the forward-looking view, there are headwinds from the global side financial conditions,” Varma said while also warning that there will be a cyclical slowdown ahead.

Likewise, Nim stated that human capital investment could be prioritized through education and health. 

“This is especially important for a post-pandemic economy where greater disruptions to the informal sector have meant widened economic and wealth inequalities,” he said, adding that the falling labor force participation rate, especially among women, was concerning.

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