India’s economy on track to become third-largest by 2027, say analysts

India’s nominal GDP is expected to accelerate at a rate of 12.4% year over year in the fiscal year 2025, surpassing China, the US, and the Euro Area, according to a recent report by Morgan Stanley. This growth would propel India to become the world’s third-largest economy with a GDP of $5 trillion by 2027.

The report also predicts that India’s share of global growth contribution will increase from 10% in 2021 to 17% in the period from 2023 to 2028. This growth is backed by an average annual growth rate of 6.6% over the fiscal years 2024-28. Key factors driving this impressive economic performance include an upturn in public capital expenditure (capex) and a surge in private capex.

Policy reforms since 2019, such as corporate tax cuts and the introduction of the Production-Linked Incentive (PLI) scheme, have attracted investments and sparked structural growth. Despite a decline in Foreign Direct Investment (FDI) inflows due to weakening global GDP and trade growth, India has managed to increase its share of global FDI from 2.4% in Q4 2017 to 4.2% in Q1 2023.

Analysts from JP Morgan forecasted a slightly lower growth rate for India’s economy this fiscal year at between 5.5%-6%, below the Reserve Bank of India’s (RBI) prediction of 6.5%. Despite facing challenges such as high interest rates, geopolitical unrest, and sluggish demand, the analysts suggest that a growth rate of 5.5% would still signify an extraordinary year for India in FY25.

The World Bank shares these concerns, estimating India’s GDP growth at 6.3% for FY24 after a 7.2% increase in FY23. The RBI has reaffirmed its GDP growth forecast of 6.5% for FY24 and FY25 but revised its quarterly projections downwards for the forthcoming fiscal year. Meanwhile, Nomura expects India’s GDP growth to slow down to 5.6% next year from 5.9% in FY24.

The April-June GDP data showed a 7.8% expansion in the Indian economy, aligning with economists’ expectations but falling short of the RBI’s 8% estimate. Aziz emphasized India’s significant dependence on global factors, arguing that domestic factors and private investment alone cannot sustain its growth.

Despite these concerns, RBI Governor Shaktikanta Das anticipates Q2 GDP growth for FY24 to exceed expectations, based on early indicators. This comes despite what he referred to as the best global year we’ve seen in a long time.

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