Prime Minister Narendra Modi on August 15 during his address to the nation on Independence Day said that India will rise to the ranks of the top three global economies within the next five years on the back of its potential in different fields. “It is 'Modi's guarantee' that India will become the third largest global economy in the next five years,” he said.
India may well be on track to becoming the 3rd largest economy in the near term. The Indian economy has the potential to grow by a robust 6.5-7% per annum, according to economists. However, a number of factors including the performance of other countries, skilling of our workforce as well as a sustained revival in domestic consumption demand would play a key role in achieving the 3rd largest economy target.
India is very much on target to becoming the third largest economy based on the IMF’s projections as well as domestic estimates. "Our real rate of investment is about 33%, the current account deficit is lowering and our demographic dividend is coming into play,” said DK Srivastava, Chief Policy Advisor, EY, while noting that India has also managed to meet the challenges thrown up by the Russian-Ukraine war that has led to supply side bottlenecks for many countries.
The Indian economy is currently ranked fifth and is behind the US, China, Japan, and Germany. Soumya Kanti Ghosh, the Group Chief Economic Advisor at State Bank of India (SBI) recently said that most likely in the next couple of years, by 2027, India will become the third largest economy, just after the US and China. And that is going to be a creditable achievement for India by any standards.
The Indian economy grew at 7.2% in 2022-23 and RBI expects India's 2023-24 GDP growth at 6.5%. “India can become the third largest economy in the world provided it grows at the current rate of growth or accelerates its growth further,” said Sunil Sinha, Senior Director & Principal Economist, India Ratings and Research. However, for that to happen, the third and fourth largest economies may have to continue growing at their current rate or at an even slower rate.
According to several economists, the Indian economy has the potential to grow by 7% in the next few years, provided that there are no further shocks. However, external demand has been muted due to the slowdown in the global economy while internal consumption demand has also not fully recovered. These remain constraints to faster growth due to which a return to 7% to 8% growth may not be possible, they noted.
“India will be a $3.7 trillion economy in 2023, maintaining its lead over the UK as the fifth largest economy of the world,” the State of the Economy article in the Reserve Bank of India’s January bulletin stated. According to the IMF’s calculations, India will move into fourth place in 2025 and into the third place in 2027 as a US $5.4 trillion economy.
A SBI Ecowrap report recently said that India is likely to get the tag of the third largest economy in 2027 (or FY28) based on actual GDP data as of March 2023, surpassing the economies of both Germany and Japan. “Behind this surge, India needs to grow by CAGR of 8.4% till 2027 (in dollar terms). This translates into 11-11.5% nominal GDP growth per annum (in Rs terms), which is eminently achievable with a 6.5-7% growth rate,” the report had said.
Goldman Sachs believes that India is poised to become the world’s second-largest economy by 2075, leapfrogging not just Japan and Germany, but the U.S. too. On top of a burgeoning population, driving the forecast is the country’s progress in innovation and technology, higher capital investment, and rising worker productivity, the investment bank said in a report. “Over the next two decades, the dependency ratio of India will be one of the lowest among regional economies,” said GS Research’s India economist Santanu Sengupta.
As per Goldman Sachs analysts, the key to drawing out the potential of India’s rapidly growing population is to boost the participation of its labour force. They forecast that India will have one of the lowest dependency ratios among large economies for the next 20 years. That really is the window for India to get it right in terms of setting up manufacturing capacity, continuing to grow services, continuing the growth of infrastructure, it added.
India’s government has placed a priority on infrastructure creation, especially in the setting up of roads and railways. Goldman Sachs believes that this is an appropriate time for the private sector to scale up on creating capacity in manufacturing and services in order to generate more jobs and absorb the large labour force. Spearheading India’s economic trajectory is also its progress in technology and innovation, the investment bank said.
S&P Global expects the size of the Indian economy to reach $6.7 trillion in 2031 from $3.4 trillion in FY23. In manufacturing, new opportunities are expected to emerge from an accelerating global trend towards supply chain diversification, said the report, as the government offered incentives to manufacturers and improving infrastructure. The economy is set to benefit from efficiency gains from tax reforms, state support to digital and physical infra, and reducing leakages from government subsidy transfers.
According to S&P Global, developing a strong logistics framework will be key in transforming India from a services-dominated economy to a manufacturing-dominant one, besides increasing female participation in the workforce to realise a demographic dividend. It added, "India's ability to become a major global manufacturing hub will be a paramount test for its economic future.”