A beautiful and colorful aerial view of the Mumbai skyline at dusk 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 is expected to overtake Japan and Germany to become the world’s third largest economy.
S&P’s forecast is based on a projection that India’s annual nominal GDP growth will average 6.3% through 2030. Similarly, Morgan Stanley estimates that India’s GDP is likely to more than double from current levels by 2031.
“India has the conditions in place for an economic boom, fueled by outbound migration, investment in manufacturing, the country’s energy transition and advanced digital infrastructure,” Morgan Stanley analysts led by Ridham Desai and Girish Acchipalia wrote in the report.
“These drivers will succeed [India] the world’s third largest economy and stock market before the end of the decade.”
India posted year-on-year growth of 6.3% in the July-September quarter, marginally beating the Reuters poll forecast of 6.2%. Earlier, India posted 13.5 percent year-on-year growth in the April-June period, boosted by strong domestic demand in the country’s services sector.
According to Refinitiv data, the country recorded a record 20.1% year-on-year growth in the three months to June 2021.
The S&P projection is dependent on India’s continued trade and financial liberalization, labor market reform, and investment in India’s infrastructure and human capital.
“This is a reasonable expectation for India, which has a lot of catching up to do in terms of economic growth and per capita income,” Dhiraj Nim, an economist at Australia and New Zealand Banking Group Research, told CNBC.
Some of the aforementioned reforms have already begun to be implemented, Nim said, emphasizing the government’s commitment to reserve more capital expenditures in the country’s annual expenditure books.
To become a more export-oriented hub
The Indian government is clearly focused on becoming a hub for foreign investors as well as a manufacturing powerhouse, and according to S&P analysts, their main means of achieving this is a manufacturing-related stimulus scheme to boost production and exports.
The so-called PLIS, which was introduced in 2020, offers incentives to domestic and foreign investors in the form of tax breaks and permits, among other things.
“It is very likely that the government is betting on PLIS as a tool to make India’s economy more export-oriented and more connected in global supply chains,” S&P analysts wrote.
Workers process metal parts at the cooking plant of GHG Reduction Technologies Pvt in Nashik, Maharashtra, India, Sunday, Nov. 13, 2022.
Dhiraj Singh | Bloomberg | Getty Images
For the same reason, Morgan Stanley estimates that India’s share of manufacturing in GDP will “increase from the current 15.6% of GDP to 21% by 2031” – meaning that manufacturing revenues could triple from the current $447 billion to about 1490 billion USD, according to the data. to the bank.
“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.
“Advantages of India [include] plenty of cheap labor, low production costs, openness to investment, business-friendly policies and a young demographic with a strong propensity to spend,” said Sumedha Dasgupta, senior analyst at the Economist Intelligence Unit.
These factors make India an attractive choice for setting up manufacturing hubs by the end of the decade, she said.
The main points of contention that could challenge Morgan Stanley’s forecasts include a lingering global recession, as India is a heavily trade-dependent economy with almost 20% of its output exported.
Other risk factors cited by the U.S. investment bank include the supply of skilled labor, adverse geopolitical events and policy failures that can result from voting in a “weaker government.”
A global slowdown could worsen the outlook for Indian export companies, India’s finance ministry said last Thursday.
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 the growth rate … but from a forward-looking perspective, there are headwinds from global financial conditions,” Varma told CNBC’s Squawk Box on Thursday, noting that there is a cyclical slowing down.
Similarly, Nim said more priority could be given to investing in human capital through education and health.
“This is particularly important for the post-pandemic economy, where greater disruptions to the informal sector have meant increased economic and wealth inequalities,” he said, adding that the declining labor force rate, particularly among women, was worrying.