With an average annual growth of 6.7% up to 2031, India will counter the Chinese super-power in Southeast Asia. But everything has a price: here are the risks he has to face.
India will become the world’s second-largest economy by 2075, overtaking Japan and Germany this year. The rise of India as a world economic power is now an inevitable reality.
Forecasts indicate that by 2075, the country could reach second place in the ranking of global economies, surpassing even China.
This is the interesting Goldman Sachs perspective, which improved on previous predictions, that India will become the world’s third-largest economy by 2035. Against the backdrop of global uncertainty, India faces an unprecedented opportunity to exploit its economic potential and improve the living conditions of its citizens.
It is not the first time that India has attempted to accelerate its development and this could be the right time to overtake China as well. However, there are risks to consider.
India’s sustained growth
According to projections by S&P Global, India will experience steady economic growth at an average annual rate of 6.7% through 2031. This forecast is supported by the strength of manufacturing and services exports and by growing domestic consumer demand. Despite the challenges of interest rate hikes and the global slowdown, India will remain the fastest-growing economy within the G20, maintaining its upward trajectory.
The International Monetary Fund improved its growth estimates for India to 6.1% for the current fiscal year, and the central bank forecasts a 6.5% increase. These figures indicate a positive trend that could lead India to overtake Japan and Germany to become the 3rd largest economy in the world as early as the end of this year. India is currently the fifth largest economy in the world, after Germany, Japan, China, and the United States.
An analysis by Deloitte shows that key sectors such as construction and agriculture have seen higher-than-expected growth and the manufacturing sector has shown a solid recovery, easing earlier concerns. Exports maintained a good trend despite the global challenges, while imports slowed down, contributing to the improvement of the balance of external accounts. Although private consumption had modest growth in 2022-23, both urban and rural demand improved, supported by car sales and employment data. Overall, the Indian economy is showing signs of recovery and strengthening, with an improving credit to deposit ratio indicating an increase in investment in the industrial and services sector.
Opportunities will emerge in various sectors, including manufacturing, thanks to supply chain diversification and government incentives for infrastructure improvements.
Why India will continue to grow
India’s economic growth will be fueled by several driving forces that will help ensure its success. One of them is the technological drive and innovation that the country has demonstrated in recent years. Labor productivity growth will be supported by technological progress, and the interest in technology is also visible through the opening of the first Apple Store in India. The Indian technology industry expects a significant increase in revenue, generated by industries like IT, business management and software.
Demography plays a key role in accelerating Indian economic growth. The demographic transition in India occurs gradually, allowing for maximum benefits from the demographic dividend over a longer period of time. The dependency ratio, i.e. the ratio of people of working age to those of non-working age, will be one of the lowest among the world’s major economies, offering the opportunity to develop production capacity, services, and infrastructure.
The convenience for investment plays a crucial role in accelerating the economic growth of India. The rising savings rate, linked to the decrease in the dependency ratio and to the increase in incomes, will create a capital endowment that will favor new investments. Additionally, the green energy transition represents a significant investment opportunity that could help drive economic growth in the future.
What could be holding back India’s growth
However, despite the bright prospects, there are challenges and hurdles India will face in order to fully realize its economic potential. The Government of India has expressed an aspiration to “dominate the world” in the global economy, but this goal requires a number of significant changes.
One critical aspect is the need to embrace national and international competition. This implies the strengthening of regulatory institutions and the reduction of protectionist instincts. The ’Made in India’ initiative has shown the importance of creating an environment conducive to foreign investment through more competitive pricing policies.
Investing in the skills and education of the youth will be crucial to capitalize on India’s demographic dividend. While the country is home to a large young population, the presence of illiterate adults presents a challenge that must be overcome to ensure a skilled and competitive workforce.
Furthermore, the decrease in freedom of the press, the weakening of political opponents, and attacks on religious minorities raise concerns for India’s democratic environment. Respect for democratic values and a robust rule of law are essential to sustain sustainable economic growth.
The unknown factor of oil
Global Oil Prices are falling on rising flows from Russia and demand concerns despite OPEC production cuts. Prices have dropped 40% since the Russian invasion of Ukraine. Saudi Arabia has announced fresh production cuts to counter the trend, but volatility may persist. Lower prices would help India, a major crude importer, by reducing import costs and inflationary pressures.
Growth forecasts (Deloitte analysis)
Deloitte presents two scenarios, one optimistic and one pessimistic. The first is a possible extension of the Russia-Ukraine crisis without further escalation. Banking crises would be controlled, with growth slowdown in the US and EU. The Fed would delay rate hikes, while oil prices would remain between $75 and $80 a barrel, moderating global inflation. The Reserve Bank of India (RBI) would balance the growth and value of the currency, and the government would continue to consolidate expenditures with rising revenues. The trend in food prices would only represent a potential threat.
In the second scenario, the Russia-Ukraine crisis continues with international involvement, causing recessions in the US and Europe and serious banking risks. Oil prices would exceed $110 a barrel, with global inflation on the rise, forcing the RBI to raise rates and then lower them in the face of a sharp fall in growth.
Conclusions
India is moving up the global economic ladder, showing a promising future thanks to solid growth forecasts, favorable demographics, and technological opportunities.
However, to achieve this goal, India faces internal challenges such as increased competition, investment in education, and respect for democratic values.
To fully realize India’s goal of becoming a global economic powerhouse, it needs to adopt a long-term strategy that balances growth with stability, maintaining effective control over monetary policy, inflation management, and capital flows.
Original article published on Money.it Italy 2023-08-25 07:50:00. Original title: L’India diventerà la seconda economia mondiale, ma attenzione ai rischi
