Dear Readers,

If one looks back at how the economy has progressed since the Global Financial Crisis of 2008, it is not hard to see that India seems to have lost more than a step or two of its growth momentum. More specifically, since 2011-12, the Indian economy has been hamstrung by some problem or the other.

First, it was the twin-balance sheet problem which referred to Indian banks being burdened with a rising mountain of Non-Performing Assets (NPAs or loans that were not being repaid) on the one hand and Indian companies being over-leveraged on the other.

By 2017, these two problems were compounded by the weakness in the non-bank finance companies (NBFC) sector as well as the real estate sector.

Consequently, just before the Covid pandemic hit India in end-March 2020, India’s economic growth rate had decelerated to less than 4%, unemployment was at a 45-year high, already low consumption levels were further stalling, poverty was rising, and India was running out of growth engines with manufacturing jobs becoming half of what they were in 2016.

The pandemic made all these variables worse while also adding high inflation to the list. Russia’s invasion of Ukraine, as it were, lit the match on inflation. ExplainSpeaking has provided detailed explanations for each of these issues in the past.

As things stand today, economists of all hues have been busy dialling down India’s growth estimates. The latest was Nomura Research, which, in light of the contraction in India’s exports in October, stated that the trade slump “warns of incoming growth headwinds”. As such, it now expects India to grow at just 4.7% in 2023. As this piece explained recently, even a 9% GDP growth in India can be largely jobless.

And yet, as the domestic stock markets show, broadly speaking, India continues to be one of the favourites of global investors.

Why is this the case?

For one, it shows the relative lack of economic prospects across the world. Many big and advanced economies — such as the US and UK — are either already in recession or staring at a prolonged one.

But interest in India is not just because other economies are doing poorly. It is also predicated on the hope that India will do well in the immediate future.

Take, for instance, a recent report by Morgan Stanley (MS), which is one of the most influential financial services companies in the world.

Titled “Why this is India’s decade”, the report states that “four global trends of Demographics, Digitalization, Decarbonization and Deglobalization” imply that India is set to become the third-largest economy within the coming decade. Some of the key implications are summarised in Table 1 alongside; the table provides three scenarios for each variable — the baseline projection, the bullish estimate and the bearish estimate.

Table 1: Key implications of India becoming the third-largest economy within the coming decade as its GDP is likely to surpass .5 trillion by 2031, more than double current levels, according to Morgan Stanley.

Simply put, MS expects that India’s GDP is likely to surpass $7.5 trillion by 2031, more than double current levels, making it the third-largest economy in the world.

Even more importantly, India’s per-capita income is expected to rise from $2,278 now to $5,242 in 2031, setting the stage for a discretionary spending boom. Further, the number of households earning more than $35,000/year is likely to rise fivefold in the coming decade, to over 25 million (see CHART 1).

Chart 1: In India, the number of households earning more than $35,000/year is likely to rise fivefold in the coming decade, to over 25 million.

What will trigger this rise?

Morgan Stanley underscores three main factors.

1: Off-shoring

“The pandemic only enhanced India’s attractiveness as the office to the world,” states the MS report. “In the post-Covid environment, global CEOs appear more comfortable with both work from home and work from India. The emergence of distributed delivery models, along with tighter labor markets globally, has accelerated outsourcing to India.” According to MS, during the two pandemic years, the number of people employed in this industry in India rose from 4.3 million to 5.1 million, and the country’s share of global services trade rose 60 basis points (bps) to 4.3%. In the coming decade, the number of people employed in India for jobs outside the country is likely to at least double to over 11 million, and MS estimates that the global spending on outsourcing could rise from $180 billion per year to around $500 billion by 2030.

But India won’t just be the office but also the factory to the world according to the MS report. “We anticipate a wave of manufacturing capex owing to government policies aimed at lifting corporate profits’ share of GDP via tax cuts and hard dollars for investing in specific sectors, and we note that performance-linked incentive (PLI) schemes now total $33 billion across 14 sectors. Multinationals are more optimistic than ever about investing in India, as the all-time high on our MNC Sentiment Index shows,” states the MS report.

2:Digital differentiation

MS points out that “India is pursuing a distinct model for the digitalization of its economy, supported by a public utility called IndiaStack”. It further explains that IndiaStack — which operates at a population scale, is a transaction-led, low-cost, high-volume, small-ticket-size system with embedded lending — will take India from a ‘prepaid’ economy to a ‘postpaid’ (buy now, pay later) one.

3: Energy transition

“While the first two drivers are unique to India, the world has seen energy transitions before. The difference for India is that both its energy consumption and energy sources are changing simultaneously in a disruptive fashion. Another difference is that India’s energy needs are still growing, and therefore legacy capacity using fossil fuels will not be destroyed as it transitions to a higher share of renewables,” states the MS report.

What are the risks to these projections?

“Key risks to our view include a prolonged global recession or sluggish growth, adverse geopolitical developments, domestic politics and policy errors, shortages of skilled labor, and steep rises in energy and commodity prices,” states the Morgan Stanley report.

If one spends any amount of time pondering over these risks, it will become clear that none of the projected gains will accrue to India automatically. India will require many global factors to align with domestic policy reforms if such lofty goals are to be achieved.

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Why Morgan Stanley is not alone?

While the MS report looks at only the coming decade, others suggest that over the longer term, India (and China) are likely to dominate the global economy.

Earlier in November, for instance, the National Bureau of Economic Research (NBER) — which is the premier and nonpartisan organisation for economic analysis in the US and the one that adjudicates whether the US economy is in recession or not — published a research paper titled “The future of global economic power”.

In it, Seth G. Benzell and other academics use the UN’s demographic data and IMF economic data to predict that China and India will become the world’s top two economies with 27.0 per cent and 16.2 per cent respectively of 2100 world GDP, respectively, while the share of the US and Western Europe will shrink to just 12.3 per cent and 11.9 per cent, respectively.

Chart 2 indicates that China and India will become the world’s top two economies with 27.0 per cent and 16.2 per cent respectively of 2100 world GDP (indicated by the red box). Further, upon tweaking the assumptions on productivity, India leapfrogs even ahead of China (indicated by the orange box).

According to the NBER paper, “productivity growth and its interaction with demographic change are the main drivers of future economic power. Fiscal conditions and automation matter are secondary factors.”. This baseline projection also features “an evolving global savings glut, major reductions in the world interest rate, substantial aging-related increases in tax rates, and permanent differences in regional living standards”.

However, when the researchers tweaked the assumptions on productivity then India leapfrogged even ahead of China (SEE CHART 2; orange box).

“If recent productivity continues and demographic projections prove accurate, India will account for one-third of world output in 2100 and China for over one-fifth. The US output share will grow slightly while other developed countries shrink dramatically,” states the NBER paper.

Uplighting as they may be, do these projections sound convincing to you? Share your views and queries at udit.misra@expressindia.com

Finally, last week’s Express Economist — the weekly video show on the Indian economy — featured Prof K S James, Director of the International Institute for Population Sciences. He explained why merely having more people in the working age cohort will not provide India with the much desired “demographic dividend”. Catch the full interview by clicking here to understand what would it take for India to avoid turning its promised demographic dividend into a demographic bomb.

Until next week,
Udit