Economic Growth of India – A New Star on Asia’s Horizon

May 23, 2023
Authored by: Author: Chandan Kumar GV, Head, Products

INTRODUCTION

“India will be one of only three economies in the world that can generate more than $400 billion annual economic output growth from 2023 onward, and this will rise to more than $500 billion after 2028.” 1

India, a land of diverse cultures, traditions, and languages, has been garnering attention as a major economic force. With a population of over 1.3 billion people, India has been setting records in economic growth and is projected to become the world’s third-largest economy by 2027, surpassing Japan and Germany. The Indian stock market is also expected to become the world’s third largest by 2030.


1. OVERVIEW OF INDIA'S GROWING ECONOMIC POTENTIAL

These economic projections are not unfounded as India currently boasts the fastest-growing economy in the world, with an average GDP growth rate of 5.5% over the last decade.1 The Indian bonds and rupee have also been top performers among Asian economies.

During the third quarter of 2022, Indian sovereign debt lost only 0.4% for dollar-based investors, offering a shelter from extreme volatility in global markets. Indian notes, along with Indonesia, had the widest spread in Asia during the quarter, supported by foreign inflows and the prospect of inclusion into global indices.2

In the next decade, India’s GDP is projected to reach over $7.5 trillion, more than doubling from its current $3.5 trillion. Additionally, India’s share of global exports is expected to double during the same period. Moreover, the Bombay Stock Exchange is predicted to grow annually by 11%, achieving a market capitalization of $10 trillion in the coming decade.1

India has been experiencing a significant transformation in recent years, and several trends are paving the way for unprecedented economic growth. The country’s rapidly expanding population, increasing digitalization, rising urbanization, and government initiatives such as Make in India and Digital India are playing a major role in driving this growth. Additionally, the growing middle class and the increasing number of startups and entrepreneurs are also contributing to India’s economic growth. These factors have created a favorable environment for businesses, investors, and entrepreneurs, making India one of the fastest-growing economies in the world.

Here is a detailed look at the key trends that are conducive to the sustained expansion of the Indian economy and what it means for the global economic landscape:


2. KEY TRENDS AND DRIVERS OF INDIA’S SUSTAINED EXPANSION

Demographic divide

India’s demographic advantage lies in the increase in its working-age population. In April 2023, the nation has surpassed China to become world’s most populous nation with a population of 1.429 billion according to the UN world population dashboard 2023.3 This significant population size presents a vast market for goods and services, attracting increased investment opportunities. Moreover, India boasts a median age of 28.2 years, and 62.5% of its population falls within the 15-59 age group, which is considered the working population of a country. This segment is projected to reach its peak by 2036, signifying a sustained presence of a young workforce compared to other nations. These demographic factors are regarded as potential advantages for India’s future economic growth.4

Growing Popularity of Global Offshoring

India has established itself as a key player in the outsourcing industry owing to its abundant labor force, competitive costs, and government support. With the rise of distributed work models in the wake of the pandemic, India’s outsourcing market is poised to gain further momentum. It is projected that the number of Indians employed in foreign countries through outsourcing will surge and may reach over 11 million, which is at least twice the current number. This growth can be attributed to the expected increase in global spending on outsourcing from $180 billion to approximately $500 billion by 2030.1

Growth in Consumer Spending

It is anticipated that the total consumption in the country will witness a significant surge from $2 trillion in 2022 to $4.9 trillion by the close of 2030. The major growth is expected to accrue to non-grocery retail segments such as clothing and accessories, leisure and entertainment, and household goods and services, among other categories. In addition, there will likely be an uptick in household income levels. The figure below delineates the shift in the distribution of this increase, which is expected to fuel greater consumer spending.

Figure 1: Household Income Distribution1

Factory of The World

India’s manufacturing sector is experiencing a boost in capital investment, driven by investment incentives and an increase in infrastructure spending. The low labor costs in the country also make it a highly attractive market. According to a Morgan Stanley report, the sentiment of multinational corporations towards investment prospects in India has hit an all-time high, indicating a growing optimism among them. It is predicted that the manufacturing industry’s contribution to India’s GDP will rise from the current level of 15.6% to 21% by 2031, leading to a doubling of India’s export market share.1

Changing Landscape for FDI

According to World Investment Report 2022, FDI inflows in Asia reached an all-time high for the third consecutive year, reaching $619 billion. Out of this total amount, six economies, namely China, Hong Kong, Singapore, India, the United Arab Emirates, and Indonesia, accounted for more than 80% of FDI inflows to the region, with India ranking seventh globally, having attracted $45 billion in inflows in 2021.4 India is projected to receive FDI inflows of $120 billion to $160 billion per year by 2025, indicating the country’s growing appeal to foreign investors.5

India’s economic growth has shown tremendous resilience over the past decade, and there are several reasons to believe that this trend will continue in the coming years. With a growing working-age population, increasing consumer spending, and a favorable environment for manufacturing and investment, India is well-positioned to become a key player in the global economy. However, continued investment in infrastructure and economic reforms will be crucial for India to fully realize its potential and establish itself as a major economic power in the world. As the country moves forward with its growth agenda, it will be interesting to see how it navigates the challenges and opportunities that lie ahead.


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References

  1. Morgan Stanley 2. Bloomberg 3. United Nations reports 4. Business Today  5. World Investment Report 6. Bloomberg Tax