The latest report put out by BOFA has projected India to become the third largest economy by 2031. Actually, this a slight delay. In the original report of 2017, BOFA had projected India to emerge as the third largest economy by nominal GDP by 2028. However, the lag effect of the pandemic took its toll. The post-pandemic recovery is expected to be frenetic across the globe and India may take longer to build the growth advantage. That is why the milestone date has been pushed back to 2031.
First, a slice of some rich GDP history
It is natural to be enthusiastic about being the third largest economy in the world. But let us take a quick walk down the GDP memory lane.
We have gone back 400 years for a perspective of how GDP power equations changed over the years. Back in Year 1700, India had 24.4% share of world GDP and China had 22.3% jointly accounting for over 46% of world GDP. In 1700, the US accounted for just 0.1% of world GDP.
In the last 400 years there have been two big stories of economic growth. Europe had started experiencing the benefits of the Renaissance and their conquests in 1750 so their share of world GDP has been stable over 400 years. But the US built its industrial and technological prowess post the American Civil War. The US market share at 24.4% of world GDP in 2020 is lower than 27.5% in 1952, but that is more due to the China story.
China is the story since 1952 as its share of world GDP went up from 5.2% to 16.3%; more pronounced after 1990. However, between 1700 and 1952, India’s share of world GDP fell to 4% and further to 3.2% by 2020. That is the anomaly that India now looks to correct.
Indian GDP still has a long road to traverse
While there are perspectives that UK and France are showing higher GDP only due to a strong currency, we will leave out that argument and focus on the IMF estimates.
India ranks seventh in Dollar GDP. To emerge the third largest economy by nominal GDP, India will have to decisively overtake UK and France in the next 2 years and then get the better of Germany and Japan by 2031, which is what the BOFA report projects. Getting close to China and the US will still be some time away and there are names like Canada, Australia and Brazil that could gain from a commodity boom.
India is already the third largest economy in the world after China and the US in terms of GDP (PPP) or the purchasing power parity. However, such measures are vulnerable to assumptions and we will stick to nominal GDP only. But what are the big drivers?
Demographics, financial inclusion and digital markets
When the report was first published by BOFA in 2017, it had projected India to become the third largest economy by 2028 due to 3 triggers.
a) Demographic dividends would be a big driver for growth. Compared to the West, Japan and China, India has the benefit of productive population for a longer period of time. It happened to the US during the 1950s and 1960s and later to China in the 1990s. India is in the midst of a demographic boom cycle.
b) Financial inclusion through Aadhar, digital growth, rapid spread of the internet and the spread of bank accounts will not only plug leakages in welfare spending, but also enable investment-driven growth. We are seeing that in a big way.
c) Today it is possible for Jio to become the largest digital player in 4 years flat. Flipkart or Amazon can give a tough time to 100-year old distribution networks. That is what digital mass markets are all about. This is likely to lead to exponential growth, although it could also cause digital cannibalization.
Two more triggers for growth come into play
While the above 3 factors will continue to play a role in the India growth story, BOFA has identified two more catalytic factors for India to reach the milestone by 2031.
a) In 1991 forex reserves were down to 21 days of imports and 2012 also created some nervous moments. In Mar-21, India has a forex chest of $585 billion that can cover 15-months imports. That is a comfort for the INR and also provides a buffer for growth.
b) The combination of liquidity infusion and lower repo rates has led to lending rates coming down and the liquidity has ensured rapid transmission of rate cuts to borrowers. The fall in borrowing costs is also likely to sustain growth in coming years.
The report has cautioned about the risks of pandemic resurgence. But, at present, the advantages are numerous as India embarks on a journey to become the third largest economy by 2031!