A Rising Star
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A Rising Star

By 2030, India will be the second-largest economy in the Asia-Pacific region as strong macro-fundamentals and an improving business environment drive investment-led growth. Increased bank lending and capital expenditures from firms coupled with improving business conditions, are promising signs to accelerate economic growth in India. Moreover, the growing role of services and India’s diversification out of the ICT sector will provide a competitive advantage, while India’s manufacturing sector is also set to grow. We expect India’s economic growth to average around +6.3% p.a. until 2030, primarily driven by investments and consumer spending, and inflation to average around 4.8% p.a. well within the Reserve Bank of India’s target range of 2-6% between 2021-2030. This rosy macroeconomic story is clouded with managing transformations which are game changers for the world, and for India: globalization, demographics, climate change, AI and technology, and conflictuality to name a few.

Five game-changers will shape India’s mid-term economic outlook: foreign investment, trade, human capital, climate change and geopolitics. Each of them calls for an active and differentiated policy stance for India to make the best out of these transitions.

  • Foreign investments must become an even stronger growth driver. Taking advantage of the geopolitical tailwinds and the growth differential with the rest of the world, India’s capacity to attract foreign capital will be pivotal. The continuation of liberalizing reforms and an orderly internationalization of capital markets will be crucial for absorbing and harnessing large amounts of foreign investments.
  • Significant trade potential can be unlocked by reducing protectionist measures and making stronger alliances. The average trade tariff stands at a high 18.1%, more than double the average of its main peers and compared to just 7.5% in China. Reducing tariffs to the average of its peers would mean USD80bn of additional exports to India per year, especially as only 3% of Indian consumer goods are imported today. By capitalizing on India’s growing role on the international stage, increasing the number of free-trade agreements can enhance its position in global supply chains.
  • Demographics will be advantageous to India’s growth story if coupled with policy reforms targeting broad measures of human capital development while keeping in mind regional disparities. Artificial intelligence capabilities can play a crucial role in driving economic growth by enabling technological innovation, job creation, automation and global competitiveness, especially in sectors such as health care and education. From 2025 onwards, India will overtake China as the country with the largest labor force in the world, with the number of people aged between 15 and 64 expected to surpass the one billion threshold in 2026 — and remain above that mark until 2075. Though the average life expectancy at birth is set to increase from 67.7 years today to 77.9 years in 2050, and to surpass 80 years in 2062 in line with further improving living standards, India will continue to have a rather young population, with the share of people aged 65 and older remaining below 30% until the end of the century. However, the demographic dividend is already set to fade within the next ten years: The total dependency ratio is likely to start increasing from 2032 onwards, though it will remain below 50% until mid-century.  To profit from its demographic dividend, India needs to implement further labor market reforms, especially to address a youth unemployment rate that is one of the highest in Asia. In the last decade, AI investments in India have soared, ranking the country sixth the world (around EUR3.1bn, according to the AI Index Report from Stanford). In 2022, there were 57 newly funded AI companies in India. These and other developments, such as growth in research and development could make India a competitive and important AI player globally. However, low literacy rates and a fierce brain drain pose significant challenges to this technology revolution in India, which policymakers have to tackle urgently.
  • Climate change can be costly to the Indian subcontinent and poses a risk to the otherwise favorable long-term growth outlook. Heat waves have already led a large number of deaths in India and put at risk the large share of the population employed in outdoor work in sectors such as construction which have limited access to affordable cooling infrastructure. While India lags behind its neighbor China in terms of mitigating the impact of climate change risks on GDP and its population, it is actively working towards reaching net zero in 2070, implementing measures such as waiving off transmission charges to attract investment in renewable energy especially in wind and solar.
  • India finds itself in a challenging (geo)political environment but stands to gain from its growing importance. The Indian government has started to prepare for the 2024 elections but the risk of fiscal slippage remains contained. On the global stage, India tends to align more and more with the US although it has tried to maintain its historical stance of non-alignment and possesses the diplomatic power to be the bridge between the Global South and the West. Yet, its growing importance must be analyzed from a multidimensional perspective due to the growing costs and tensions to neighboring regions. 

Source : Alliance