Mumbai: The Reserve Bank of India’s recent bulletin has identified six key factors that are set to drive India to become the world’s third-largest economy.
In terms of purchasing power parity (PPP), India is already the world’s third-largest economy. The OECD’s December 2023 update projects that India will surpass the US by 2045 in PPP terms, becoming the world’s second-largest economy.
The bulletin outlines the factors likely to accelerate India’s economic ascent:
- Demographics: India currently boasts the world’s largest and youngest population, with a median age of approximately 28 years. Aging is not expected to become a significant factor until the mid-2050s. This demographic advantage is anticipated to fuel over three decades of growth, driven by increasing working-age population rates and labour force participation, in stark contrast to many countries grappling with an aging population.
- Domestic-Led Growth: Historically, India’s growth has been driven by domestic resources, with foreign savings playing a supplementary role. The current account deficit (CAD) remains sustainable, averaging around 1 per cent of GDP. This is supported by various indicators of external sector resilience, such as external debt being below 20 per cent of GDP and net international investment liabilities below 12 per cent.
- Fiscal Consolidation: The post-Covid fiscal consolidation strategy has reduced the general government deficit to 8.6 per cent of GDP and public debt to 81.6 per cent of GDP by March 2024. Utilising a dynamic stochastic general equilibrium (DSGE) model, the RBI suggests that reprioritising fiscal spending towards productive employment sectors, embracing transition, and investing in digitalisation could further reduce general government debt to 73.4 per cent of GDP by 2030-31. In comparison, the IMF projects the debt-GDP ratio for advanced economies to rise to 116.3 per cent by 2028 and to 75.4 per cent for emerging and middle-income countries.
- Financial Sector Stability: India’s financial sector is predominantly bank-based. Following the global financial crisis, the overhang of asset impairment was addressed through an asset quality review (AQR) in 2015-2016, followed by significant recapitalisation from 2017-2022. As a result, gross and net non-performing assets ratios declined to 3.9 per cent and 1 per cent, respectively, by March 2023, with substantial capital buffers and liquidity coverage ratios exceeding 100 per cent. The Insolvency and Bankruptcy Code (IBC) has further solidified the institutional framework for managing stress in banks’ balance sheets, establishing a foundation for macroeconomic and financial stability.
- Technological Advancements: India is undergoing a transformative shift leveraging technology. The integration of Jan Dhan (basic no-frills accounts), Aadhaar (universal unique identification), and mobile phone connections, known as the JAM trinity, is expanding the scope of formal finance, boosting tech startups, and facilitating targeted direct benefit transfers. India’s Unified Payments’ Interface (UPI), an open-ended system integrating multiple bank accounts into a single mobile application of any participating bank, is driving seamless inter-bank, peer-to-peer, and person-to-merchant transactions.
- Inflation Moderation: Inflation in India is stabilising after surging due to multiple and overlapping supply shocks from the pandemic, weather-induced food price spikes, supply chain disruptions, and global commodity price pressures following the Russia-Ukraine conflict.
The bulletin underscores the significant potential and promising trajectory of India’s economic growth, underpinned by these fundamental factors.
