Will India’s economy live up to the hype?

Indian GDP on the rise:

By almost all accounts, India has had a good few years. Since 2010, the country’s GDP has doubled in nominal terms from USD 1.7 trillion to USD 3.4 trillion. Over the same period, real GDP growth has averaged 6.1%, one of the best rates in Asia. The stock market is up by around half from pre-pandemic levels, underpinned by increasing interest from overseas fund managers. Multinationals are investing in new manufacturing facilities in the country. Earlier this year, India overtook China as the world’s most populous nation; the demographic gap between the two will widen going forward. And foreign dignitaries are rushing to boost ties with New Delhi: Prime Minister Modi, currently on an official state visit to the U.S., is only the third leader to whom President Biden has granted such a distinction.

Robust growth to continue:

Economic conditions should remain fairly rosy. The Consensus among our analysts is for India’s economy to expand 6.3% each year on average from 2023 to 2027; in Asia, only Bangladesh is expected to record faster growth. By 2027, India is seen vying with Germany and Japan for the spot of the world’s third-largest economy. Progress will be broad-based, with rapid advances seen in private consumption, fixed investment, government spending and exports. Domestic political stability, a business-friendly reform agenda, strong population growth and increased interest from foreign firms looking to diversify supply chains away from China will all underpin activity.

Economic roadblocks:

That said, growth would be even faster if it weren’t for shoddy infrastructure; according to India’s transport minister, logistics costs represent 16% of GDP—double the figure of advanced economies. And while the country churns out 1.5 million engineering graduates annually, the education system as a whole is deficient; average years of schooling adjusted for learning are a mere 7.2, below other up-and-coming Asian nations such as Vietnam (11.0), Thailand (8.9) or Indonesia (8.0). Moreover, the government’s “Make in India” push to boost manufacturing self-reliance could lead to an inefficient allocation of capital and relatively few new jobs.

Political risks to growth:

An escalation of border clashes with China and territorial disputes with Pakistan are major geopolitical risks, despite their low probability of occurrence. Then there is India’s leader himself: Modi has exhibited a creeping authoritarianism in recent years, and is accused of clamping down on media freedoms, religious minorities and general dissent. A continuation of this tendency spells risks to ties with the West, FDI and rational policymaking; the ailing economies of Russia and Turkey, whose leaders developed similar autocratic bents, are cautionary tales.

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Insights From Our Analyst Network

On the labor market, analysts at the EIU said:

“India’s working-age population is expected to exceed 1bn by the end of this decade. Although only limited direct employment will be generated by the manufacturing sectors, services included in the manufacturing ecosystem will be meaningful generators of employment. For example, the logistics industry has emerged as one of the top five employment-generating sectors in the country since 2020.”

On the government’s manufacturing push, Goldman Sachs analysts said:

“The government’s $33bn Production-Linked-Incentive (PLI) schemes aim to boost India’s Energy Transition, reduce imports, and eventually help India become a global manufacturing hub. $58bn capex (4.1% additional annual capex for BSE 500 companies) has been approved by the government to generate a revenue of US$455bn over 5-6 years, generate 6mn+ jobs, result in $18bn lower trade deficit, entails $23bn annual credit opportunity (add 1.5% to banking system credit growth annually) and add 70bps to GDP growth. These are staggering numbers.”

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