Geopolitical dynamics have become more complex, with shifts in strategic alliances and ongoing adjustments in global supply chains. The pandemic has also had lasting effects on these structural changes.
This backdrop provides a strategic opportunity for India to lay the groundwork for an economic renaissance that would redefine its role in the global order in the coming years. India’s long-term economic promise remains intact, though realising its full potential will require the country to navigate institutional reforms, investment gaps and geopolitical shifts.
In this context, we outline our four D framework, which will complement and supplement the economy’s growth towards 2040; i) Development agenda which is focused on growth, including extracting the essence of one of the key differentiators, that is, demographic dividend, use of which hinges on how effectively the country invests in human capital; ii) Diversification, which involves an emphasis on expanding its growth footprint in exports and manufacturing capabilities and diversifying trading partners as well as from purely goods to services; iii) the need to prioritise Decarbonisation is likely to only grow in the coming years; and lastly iv) Digitalisation, with the ecosystem of a young, connected population and rising data penetration, which lends itself to digital transformation becoming central to productivity, governance, and financial inclusion.
Over $11 trillion GDP by 2040
On to the numbers and our underlying assumptions. We forecast India’s economy to grow by an average 6.7% from 2025 to 2040. This will outpace China’s 3.0% average real GDP expansion in the same period (based on our 2040 report for China), as well the ASEAN-6 region (based on our 2040 report for ASEAN-6). Nominal GDP (INR basis) is expected to average 9.7%. We also draw out a ‘bull case’ where growth could average a sharper 7.3-7.5% in the same period. If our base case growth projections come to fruition, we expect India’s nominal GDP economy to pass the $5.6trn mark by 2030 and near $11.5trn by 2040. Per capita income is on course to beat $3700 within this decade and rise to $7000 by 2040, firmly into the upper middle- income country threshold. These are likely to be key milestones ahead of the ‘Viksit Bharat’ goalposts set by the government.
Investment and labour availability will be key drivers of growth
Amongst the key factors of production, demographics and labour availability are crucial catalysts to sustain growth. We project that 1.8 percentage point (ppt) i.e., (a quarter share in growth) lift is likely from the labour component. The contribution of the sizeable working age population (quantity) is expected to be complemented by improvement in human capital (quality) and enhanced labour productivity. Capital formation via faster investment growth will also be a crucial contributor to overall growth over the next decade and a half, with this driver expected to contribute 2.6ppt (40% of overall growth).
The Solow Growth Model highlights three factors of production – capital, labour and technology – as primary to growth. Of these, technology represented as TFP i.e. Total Factor Productivity in our analysis refers to the contribution of efficiency, as well as technological advancements and is the residual factor after accounting for capital and labour inputs.
In our view, there are two parts to TFP, development of digital infrastructure and economic reforms. TFP has been a crucial regional growth driver prior to the pandemic, and we expect it to be as important in the next decade and a half, contributing around a third share to India’s growth.
Likely to see a road map to deepen integration into value chains
In the near-term, the trade strategy is likely to be under focus. India’s growth is predominantly domestically driven, compared to more export-led ASEAN economies. Trade has grown in importance, even though relative to GDP it remains below the world average.
The moving correlation of world exports (goods and services) and India’s exports since 2000 is high at over 0.9, suggesting a close linkage between the two. Notably, India’s exports as percent of GDP peaked during 2000-2010, thereafter stabilising around 21% of GDP in the past two years. India is beginning to exploit its potential of trade, especially as a contributor to growth.
We expect a strategic roadmap to achieve deeper integration into the global value chains, which is currently being pursued alongside a push towards import substitution and indigenisation plans. The roadmap is likely to be a mix of simplifying the business ecosystem, sticking with infrastructure investments plans, development of skilled workforce as well as to provide favourable manufacturing incentives to lower operating costs as well as beat regional competition.
Drawing parallels with the experience of regional peers will also be timely. The October edition of the UNCTAD report emphasise these findings: actionable plans like extending the sectoral framework to cover more industries, lowering non-trade barriers and advancing as well as streamlining standards, quality etc, and building resilience through diversification and build-up in ecosystem/ industry clusters.
In all, India is one of the two markets (besides China) that provides a combination of a well-sized consumption market, capacity to absorb large-scale production, and garner sufficient interest from the investment community for the diversification play. As an imperative, a clear matrix framework on selected product and geography-specific push will also be helpful in channelising executive and administrative efforts to materially improve the economy’s export share as well as defend against diversification attempts by other peer countries.
(Radhika Rao is Senior Economist and Executive Director, DBS Bank.)
Views are personal and do not represent the stand of this publication.
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