India’s economic future

A report global financial services firm Morgan Stanley has forecast that by 2026 India will become the third largest economy in the world.

Background

India’s economy can be described as a developing economy. It is the world's seventh-largest economy by nominal Gross Domestic Product. It is also the third largest economy in terms of Purchasing Power Parity (PPP). However, it ranks at 141 in per capita GDP (nominal).

In 2017, the growth of the Indian economy has considerably slowed down. Between the months of April and June, it grew by 5.7%, which is a three year low.

Experts believe that economic slowdown was caused by demonetization as well as the rollout of GST.

Analysis

The prognosis for the Indian economy in 2017 has been less than stellar. The Asian Development Bank (ADB) has lowered India’s GDP growth forecast for the current fiscal to 7%. It had earlier estimated India’s growth rate would be 7.4% in July 2017. 

However, a new report by Morgan Stanley predicts a healthier economic future for the nation. The report suggests that by 2026 India will become the third largest economy in the world. Morgan Stanley head India research and India equity strategist Ridham Desai said, “We estimate that digitization will provide a boost of 50-75 basis points to GDP growth and forecast that India will grow to USD 6 trillion economy and achieve upper-middle income status by 2026-27.”

He also added, “We expect India's real and nominal GDP growth to compound annually by 7.1 per cent and 11.2 per cent respectively over the coming decade.”

The report, India's digital leap - The multi-trillion dollar opportunity, states that digitization would play a prominent role in India’s growth. Desai noted that by 2027, India will have a market capitalization of $1.8 trillion (Rs 1,80,000 crore). The firm is also has predicted the foreign direct investment will exponentially grow. He noted, “We project gross Foreign Direct Investment inflows amounting to US $120 billion (Rs 12,000 crore) by 2026-27, almost double the current 12-month trailing run rate of US $64 billion (Rs 6,400 crore).”

However, there are those who remain skeptical of the state of the Indian economy. Yashwant Sinha, former Finance Minister of the Vajpayee government openly criticized the government in an op-ed recently. He wrote, "Private investment has shrunk as never before in two decades, industrial production has all but collapsed, agriculture is in distress, construction industry, a big employer of the work force, is in the doldrums, the rest of the service sector is also in the slow lane, exports have dwindled, sector after sector of the economy is in distress.” He added that “demonetization has proved to be an unmitigated economic disaster.”

Assessment

Our assessment is that the Indian economy is at a crossroads currently. Digitization could create an economic upside. However, this will fructify only if we are able to ensure digital security.  We feel that the recent remarks by United Nations Conference on Trade & Development (UNCTAD), that Indian economy is facing serious downside risk due to demonetization, GST and corporate de-leveraging merit attention.  

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Indian economy woes