India may well be on track to becoming the third largest economy in the world in the coming years, but 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 this. The Indian economy, however, has the potential to grow by a robust 6.5–7% per annum, according to economists.
“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 Adviser, 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.
He, however, stressed that creating productive jobs for the labour force while adopting new technologies such as AI to enhance the productivity must be taken up. “A large part of the government budget would have to be spent on training and reskilling the labour force,” he said.
Apart from GDP, India is also doing better on other parameters such as overall indebtedness of the economy, which is much lower at about 170% of the GDP. Japan has the largest debt to GDP ratio at over 400%, Srivastava said, while China’s is at close to 300% and Germany’s is about 190%.
Prime Minister Narendra Modi in his Independence Day speech said the country would be among the top three economies in five years if his government is re-elected for a third consecutive term.
“When we came in 2014, we were at number 10 in the global economy, and today the persistent efforts of 140 crore countrymen have finally paid off as we have reached the rank of number five in the world economy,” the Prime Minister said.
According to IMF projections, India overtook the UK to become the fifth largest economy last September, and was behind only the US, China, Japan and Germany.
The Indian economy grew at 7.2% in 2022-23 and is expected to grow at a slower 6–6.5% this fiscal. Many agencies are likely to review their GDP growth forecast for the fiscal after the first quarter GDP data is released on August 31.
“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 but cautioned that for that to happen the third and fourth largest economies may have to continue growing at their current rate or at even slower rate.
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.
NR Bhanumurthy, Vice-Chancellor, Dr BR Ambedkar School of Economics University, Bengaluru said given the current level of savings and investments, the Indian economy has the potential to grow by 7% in the next few years provided that there are no further shocks. “For growth higher than this, we would require more structural changes,” he said, cautioning that the kind of shocks the Indian economy faces is much more severe.
As per various agencies, India could become the third largest economy by 2030, if not by 2027.
“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 had noted. 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.
More recently, a report by SBI Ecowrap said India is likely to get the tag of the third largest economy in 2027 (or FY28) based on actual GDP data as on 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.
The World Economic Outlook Update by the IMF in July 2023 has forecast that the German economy will contract by 0.3% in 2023 and grow by 1.3% in 2024. The Japanese economy is estimated to grow by 1.4% this year and by 1% in 2024. India is expected to grow by 6.1% this fiscal (6.6% in calendar year 2023) and by 6.3% next fiscal (5.8% in calendar year 2024).