India is likely to achieve strong growth over the next decade and emerge as the world’s third-largest economy, overtaking Japan in nominal GDP by 2028, says a report titled ‘India 2028’ by Bank of America Merrill Lynch.
India has already overtaken Brazil and Russia to emerge as the second largest BRICS economy after China and is expected to soon overtake France and Britain to emerge as the world’s fifth largest economy after Germany by 2019.
The report read, “We see India crossing Germany and Japan in nominal GDP in dollar term by 2028. This assumes that the Indian economy grows at 10 per cent (in nominal US GDP) in the next decade, well ahead of Japans 1.6 per cent.”
The American brokerage has conservatively projected the country’s real GDP growth at 7 per cent potential.
The three strong growth drivers that are expected to help India grow fast are as follows:
1. Falling dependency ratios
It is expected to raise saving and investment rates.
Rising saving and investment rates, driven by falling dependency ratios, should fund an estimated 7per cent real growth. The report assumes build in 6 per cent inflation and 3 per cent depreciation to arrive at 10per cent nominal growth in US dollar terms.
2. Financial maturity
Financial maturity due to financial liberalization and inclusion should continue to lower lending rates structurally.
The credit to GDP ratio, a proxy for financial maturity, will likely climb to 83 per cent of GDP from 44 per cent in 2001-17 a driven by financial inclusion and financial market development among others. This, in turn, is expected to pull down interest rates.
3. Increasing incomes and affordability
It will likely underpin the emergence of mass markets, supporting an expected 7 per cent real GDP growth.
The economists forecast the emergence of mass markets powered by rising incomes, on the demand side, as well as economies of scale, on the supply side.
A virtuous cycle is seeing higher affordability, as incomes rise, which allows manufacturers to hold the price line on economies of scale, this, in turn, reinforces affordability.