2035 Peering into India’s economic future

ASIA 2035: CRYSTAL GAZING FOR THE INDIAN ECONOMY

Given the tumultuous geopolitical landscape, what does 2035 hold for the Indian economy?

India ranks among the fastest-growing economies globally and is positioned to sustain this trajectory, aspiring to attain high-middle-income status by 2047, marking the centenary of Indian independence. The nation is resolutely committed to navigating the challenges of climate change, aligning with its ambitious target of achieving net-zero emissions by 2070.

Despite these advancements, certain challenges persist. Consumption inequality endures, reflected in a Gini index hovering around 35 for the past two decades. Child malnutrition remains a concern, with 35.5 percent of children under five years experiencing stunting, a figure that rises to 67 percent among children aged 6-59 months. While headline employment indicators have improved since 2020, apprehensions linger regarding the quality of jobs generated, the actual wage growth, and the relatively low participation of women in the labour force.

India’s Growth Trajectory

India's aspiration to achieve high-income status by 2047 will need to be realized through a climate-resilient growth process that delivers broad-based gains to the bottom half of the population. Growth-oriented reforms must be accompanied by an expansion in good jobs that keeps pace with the number of labour market entrants. At the same time, gaps in economic participation will need to be addressed, including by bringing more women into the workforce.

After real GDP contracted in FY20/21 due to the COVID-19 pandemic, growth bounced back strongly in FY21/22, supported by accommodative monetary and fiscal policies and wide vaccine coverage. Consequently, in 2022, India emerged as one of the world's fastest–growing economies despite significant global environmental challenges–including renewed supply line disruptions following the rise in geopolitical tensions, the synchronized tightening of global monetary policies, and inflationary pressures.

In FY22/23, India's real GDP expanded by an estimated 6.9 per cent. Growth was underpinned by robust domestic demand, strong investment activity bolstered by the government's push for investment in infrastructure, and buoyant private consumption, particularly among higher-income earners. The composition of domestic demand also changed, with government consumption being lower due to fiscal consolidation.

Since Q3 FY22/23, however, there have been signs of moderation, although the overall growth momentum remains robust. The persisting headwinds – rising borrowing costs, tightening financial conditions and ongoing inflationary pressures – are expected to weigh on India's growth in FY23/24. Real GDP growth will likely moderate to 6.3 percent in FY23/24 from the estimated 6.9 percent in FY22/23.

The general government fiscal deficit and public debt to GDP ratio increased sharply in FY20/21 and have been declining gradually since then, with the fiscal deficit falling from over 13 percent in FY20/21 to an estimated 9.4 percent in FY22/23. Public debt has fallen from over 87 percent of GDP to around 83 per cent over the same period. Increased revenues and a gradual withdrawal of pandemic-related stimulus measures have largely driven the consolidation. At the same time, the government has remained committed to increasing capital spending, particularly on infrastructure, to boost growth and competitiveness.

Positive Signals

According to the latest India Development Update (IDU) from the World Bank, India persists in demonstrating resilience amidst a challenging global environment. Despite considerable global hurdles, the report, which serves as the Bank's flagship semiannual overview of the Indian economy, notes that India achieved a growth rate of 7.2% in FY22/23, making it one of the fastest-growing major economies. India's growth rate was the second-highest among G20 nations, nearly double the average for emerging market economies. This resilience was driven by robust domestic demand, substantial public infrastructure investment, and a strengthening financial sector. Bank credit growth also increased to 15.8% in the first quarter of FY23/24, compared to 13.3% in the same period of FY22/23.

However, the IDU anticipates that global challenges will persist and intensify due to high global interest rates, geopolitical tensions, and sluggish global demand. Consequently, global economic growth is expected to decelerate over the medium term, influenced by these combined factors.

Given these circumstances, the World Bank projects India's GDP growth for FY23/24 to be 6.3%. This expected moderation is primarily attributed to challenging external conditions and diminishing pent-up demand. Nevertheless, the service sector is anticipated to maintain strong activity with a growth rate of 7.4%, and investment growth is projected to remain robust at 8.9%.

Auguste Tano Kouame, the World Bank's Country Director in India, commented on the short-term challenges posed by an adverse global environment, emphasizing the need for tapping into public spending to attract more private investments, thereby creating more favourable conditions for India to seize global opportunities and achieve higher growth in the future.

Recent months saw a spike in inflation, reaching 7.8% in July, driven by increased prices of food items like wheat and rice due to adverse weather conditions. The World Bank expects inflation to gradually decrease as food prices normalize and government measures enhance the supply of key commodities. Dhruv Sharma, Senior Economist at the World Bank and lead author of the report, projects a moderation in inflation, asserting that overall conditions will remain conducive for private investment. He also anticipates the growth of foreign direct investment in India as the global value chain rebalances.

Looking at fiscal indicators, the World Bank foresees fiscal consolidation continuing in FY23/24, with the central government fiscal deficit projected to decline from 6.4% to 5.9% of GDP. Public debt is expected to stabilize at 83% of GDP. On the external front, the current account deficit is anticipated to narrow to 1.4% of GDP, with sufficient financing from foreign investment flows and support from large foreign reserves.

Outlook

According to a report unveiled by S&P Global, the nation's GDP is anticipated to expand from 6.4% in 2023 to 7% in 2026. The report foresees India ascending to the third-largest economy by 2030. Presently, India ranks as the fifth-largest economy globally, trailing behind the US, China, Germany, and Japan.

"We see India reaching 7 per cent in 2026-27 fiscal…India is set to become the third-largest economy by 2030, and we expect it will be the fastest-growing major economy in the next three years," S&P said.

As per the "Global Credit Outlook 2024" published by S&P, India is expected to lead as the fastest-growing emerging market worldwide. However, determining whether the country can successfully transform into the next major global manufacturing hub is a crucial challenge.

The report further underscores that India's growth is projected to be 6.4% in the fiscal year 2023-24, marking a decrease from the 7.2% recorded in the preceding financial year. The rating agency anticipates that the growth rate will persist at 6.4% in 2024-25 before witnessing an upturn to 6.9% in the subsequent year, eventually reaching 7% in 2026-27.

Determinants Of Change

"A strong logistics framework will be key in transforming India from a services-dominated economy into a manufacturing-dominant one," according to the report.

The rating agency emphasizes the importance of India's ascent as a global manufacturing hub, highlighting a significant opportunity for the country. It underscores the need for a robust logistics framework to transition India's economic focus from service-oriented to manufacturing-dominated.

To unlock the potential of the labour market, S&P recommends enhancing the skills of workers and increasing female participation in the workforce. The agency believes that success in these areas will enable India to harness its demographic dividend.

"Success in these two areas will enable India to realise its demographic dividend," it said.

S&P emphasizes that the flourishing domestic digital market in India has the potential to drive the growth of the high-potential startup ecosystem, particularly in financial and consumer technology, in the upcoming decade.

James Sullivan, the Managing Director of Asia Pacific Equity Research at JPMorgan, anticipates that the Indian economy will double to $7 trillion by 2030, with the manufacturing sector's contribution increasing to nearly 25% from the current 17%. Additionally, he foresees exports doubling to over a trillion dollars. Sullivan envisions India ascending to the position of the world's third-largest economy by 2027 as part of this growth trajectory.

According to the S&P Global report, India is poised to surpass Japan and secure its position as the second-largest economy in Asia by 2030. The Indian economy, having experienced two consecutive years of rapid growth in 2021 and 2022, has sustained robust expansion throughout 2023.

Currently holding the rank of the world's fifth-largest economy, India is projected to surpass Japan and claim the position of the third-largest global economy, boasting an anticipated GDP of $7.3 trillion by 2030, according to the latest report from S&P Global Market Intelligence.

Positive Near-Term Horizon

S&P Global underscores an optimistic near-term economic outlook, projecting sustained rapid expansion throughout 2023 and 2024, primarily driven by robust domestic demand. The report also points to a decade-long influx of foreign direct investments (FDI) into India, reflecting the nation's favourable long-term growth prospects, supported by a youthful demographic profile and increasing urban household incomes.

According to the report, India's nominal GDP, measured in USD terms, is anticipated to surge from $3.5 trillion in 2022 to $7.3 trillion by 2030. This substantial growth trajectory is expected to position India as the second-largest economy in the Asia-Pacific region, surpassing Japan. By 2030, it is projected to exceed that of Germany.

The United States currently maintains its position as the world's largest economy, boasting a GDP of $25.5 trillion, representing a quarter of the global GDP. China follows as the second-largest economy, with a GDP of approximately $18 trillion, constituting nearly 17.9 per cent of the world GDP. Japan ranks as the third-largest economy with a GDP of $4.2 trillion, and Germany holds the fourth position with a GDP of $4 trillion.

Long-Term Growth Drivers

S&P Global outlines several key factors supporting India's enduring economic prospects. These factors encompass a swiftly expanding middle class, driving consumer spending, a thriving domestic consumer market, and substantial investments from multinational corporations across diverse sectors such as manufacturing, infrastructure, and services.

Moreover, India's ongoing digital transformation is poised to accelerate the growth of e-commerce, reshaping the retail consumer market in the next decade. The report highlights that this transformation has attracted investments from global technology and e-commerce giants into the Indian market. The projection indicates that by 2030, the number of internet users in India will reach 1.1 billion, doubling from the estimated 500 million in 2020.

The report underlines the resilience of India's Foreign Direct Investment (FDI) inflows, which have shown consistent momentum over the past five years, even amid the pandemic years of 2020-2022. Notably, investments from global technology multinationals (MNCs) and a notable increase in FDI from manufacturing firms contribute significantly to this ongoing growth.

Assessment

India is expected to persist as one of the globe's swiftest-growing economies in the coming decade, establishing itself as a vital long-term growth market for multinational companies spanning diverse industries. This encompasses manufacturing, services, and sectors such as banking, insurance, asset management, healthcare, and information technology.

As 2035 appears on the economic horizon, India has a number of

prosperity

-supporting trends, including its digital transformation, technological

moorings

,

a rapidly growing middle class, propelling consumer spending, a flourishing domestic consumer market, and significant investments from multinational

corporations.