Goldman Sachs predicts India will overtake US to become world's second-biggest economy by 2075

Banking giant Goldman Sachs on Monday said that India could become the world’s second-largest economy by 2075, leapfrogging US, Japan and Germany.

India's population of 1.4 billion people is expected to drive significant economic growth, with Goldman Sachs Research projecting that India will possess the second-largest economy globally by 2075, said a report by Goldman Sachs.

Santanu Sengupta, Goldman Sachs Research's India economist, highlighted the importance of enhancing labour force participation and providing training and skills to harness India's vast talent pool.

He emphasised the favourable demographics of India, with a robust working-age population in relation to children and the elderly, presenting an opportune window for India to optimise its manufacturing capacity, expand services, and foster infrastructure growth.

“Over the next two decades, the dependency ratio of India will be one of the lowest among regional economies,” said Sengupta.

In the report, Sengupta discussed the drivers of Goldman Sachs Research's long-term forecasts for India's economy, highlighting the significance of innovation, increased worker productivity, and capital investment. He noted that India's favourable demographics, rising savings rates, and a conducive environment for private sector capital expenditure will contribute to its growth potential.

“India has made more progress in innovation and technology than some may realise. Yes, the country has demographics on its side, but that’s not going to be the only driver of GDP. Innovation and increasing worker productivity are going to be important for the world’s fifth-biggest economy. In technical terms, that means greater output for each unit of labor and capital in India’s economy,” said Sengupta

“Capital investment is also going to be a significant driver of growth going forward. Driven by favourable demographics, India’s savings rate is likely to increase with falling dependency ratios, rising incomes, and deeper financial sector development, which is likely to make the pool of capital available to drive further investment,” he added.

India's demographic transition, occurring gradually over an extended period compared to other Asian countries, presents an advantage. The country's low dependency ratio, reflecting a smaller non-working-age population dependent on the working-age population, offers an opportunity to establish manufacturing capabilities, sustain services growth, and continue infrastructure development.

While India has experienced infrastructure development led by the current government, Sengupta believes it is also an opportune time for the private sector to scale up capacities in manufacturing and services to create jobs and absorb the large labor force.

Sengupta also outlined potential risks to India's economic growth, emphasising the need to increase the labor force participation rate, particularly among women. Upside growth potential lies in higher productivity facilitated by digitalisation and the unique identification system, Aadhaar, which enhances public service delivery and widens access to credit for smaller businesses, he said.

“Net exports have always been a drag on growth, because India runs a current account deficit. In recent times, we are seeing some progress on that front. Services exports have been increasing, and that is somewhat cushioning current account balances,” he added.

The macroeconomic impact of commodity prices is also significant for India, as it imports commodities required for its large population.

However, India has shown resilience in external balance dynamics, driven by structural improvements in the current account, services exports, and strategic reserve buffers, said the report.

Regarding green energy, India has ambitious targets, aiming for net-zero emissions by 2070, 50% power generation capacity from non-fossil sources by 2030, and a focus on electric vehicles and green hydrogen.

While transitioning to green energy presents a significant investment opportunity, the country's reliance on fossil fuels will persist until the transition is complete.

India's commitment to green energy aligns with global sustainability goals and provides avenues for growth and innovation in the energy sector.

“Transitioning to green energy is a large investment opportunity, but it’ll take time. In the interim fossil fuels are going to be the majority share in energy needs until India transitions to green energy,” concluded Sengupta.

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