Beautiful and colorful aerial view of Mumbai skyline during twilight as seen from Currey Road on February 16, 2022 in Mumbai, India.
Pratik Chorge | Hindustan Times | Getty Images
According to S&P Global and Morgan Stanley, India will overtake Japan and Germany to become the third largest economy in the world.
S&P’s forecast is based on the forecast that India’s annual nominal gross domestic product growth will average 6.3% through 2030. Similarly, Morgan Stanley estimates that India’s GDP is likely to more than double by 2031 from current levels.
“India has set the stage for an economic boom fueled by offshoring, manufacturing investment, 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 do it [India] the third largest economy and the third largest stock market in the world before the end of the decade.”
India posted 6.3% yoy growth for the July-September quarter, marginally ahead of a Reuters survey of 6.2%. Previously, India posted 13.5% yoy growth from April to June, buoyed by robust domestic demand in the country’s services sector.
According to data from Refinitiv, in the three months to June 2021, the country saw a record 20.1% year-on-year growth.
“These drivers will do it [India] the third largest economy and the third largest stock market in the world before the end of the decade.”
S&P guidance is dependent on continued Indian trade and financial liberalization, labor market reform and investment in India’s infrastructure and human capital.
“This is a reasonable expectation from India, which has a lot of catching up to do in terms of economic growth and per capita income,” Dhiraj Nim, an economist with Australia and New Zealand Banking Group Research, told CNBC.
Some of the above reforms are already underway, Nim said, highlighting the government’s commitment to foresee more capital spending in the country’s annual spending books.
Become a more export-oriented hub
According to S&P analysts, the Indian government has a clear focus on becoming a hub for foreign investors as well as a manufacturing powerhouse, and its main vehicle for doing so is the Production Linked Incentive Scheme to boost manufacturing and exports.
The so-called PLIS, introduced in 2020, offers incentives for domestic and foreign investors, including in the form of tax breaks and license fees.
“It is very likely that the government will look to PLIS as a tool to make the Indian economy more export-oriented and more connected to global supply chains,” wrote S&P analysts.
Workers processing metal parts at a cookstove manufacturing facility of GHG Reduction Technologies Pvt in Nashik, Maharashtra, India on Sunday November 13, 2022.
Dhiraj Singh | Bloomberg | Getty Images
For the same reason, Morgan Stanley estimates that India’s manufacturing sector’s share of GDP “will increase from 15.6% of GDP currently to 21% by 2031” – meaning that manufacturing revenues will increase from the current $447 billion Bank.
“Multinationals are more optimistic than ever about investing in India… and the government is encouraging investment both by building infrastructure and making land available for factories,” Morgan Stanley said.
“India’s advantages [include] plentiful cheap labour, low manufacturing costs, openness to investment, pro-business policies and a young demographic with a strong propensity to consume,” said Sumedha Dasgupta, a senior analyst at the Economist Intelligence Unit.
These factors make India an attractive choice for establishing manufacturing centers by the end of the decade, she said.
risk factors
One of the salient sticking points that could cast doubt on Morgan Stanley’s forecast is a prolonged global recession, as India is a highly trade-dependent economy and nearly 20% of its production is exported.
Other risk factors cited by the US investment bank include the supply of skilled labor, unfavorable geopolitical events and policy failures that may result from the election of a “weaker government”.
A global slowdown could dampen prospects for India’s exporters, India’s Finance Ministry said last Thursday.
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Although India’s overall GDP is already above pre-Covid levels, forward-looking growth will be “much weaker” compared to previous quarters, said Sonal Varma, chief economist at Nomura.
“Real GDP is now 8% above pre-Covid levels in terms of growth rate… but in terms of looking forward, there are headwinds from financial conditions on the global side,” Varma told CNBC’s Squawk Box on Thursday warned a cyclical slowdown is imminent.
Similarly, Nim also said human capital investment could be prioritized over education and health.
“This is particularly important in a post-pandemic economy where greater disruption to the informal sector has led to greater economic and wealth inequalities,” he said, adding that falling labor force participation rates, particularly among women, are a concern.
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