The Indian economy is set to become the third largest in the world with an annual output of $7.5 trillion by 2031, according to a recent report published by Morgan Stanley. The document, which has garnered a lot of attention among investors as well as the media, listed many factors that could bolster the country’s economy. They include the creation of a world-class digital infrastructure, policy initiatives focussed on manufacturing and energy transition, strong consumer demand as well as offshoring capabilities.

India will remain among the fastest growing economies this year, the World Bank said in its latest report on “Global Economic Prospects’’. Even as the rest of the world is grappling with highly restrictive financial conditions and persistent inflation, South Asia’s largest economy is expected to expand 6.3% in 2023, powered by growth in private consumption and investment, and a robust services sector
Encouraging picture
The World bank forecasts the economy will grow 6.4% next year and 6.5% in 2025, compared with an average growth of 5.5% over the past decade. In May, the services Purchasing Managers Index reached its highest level in more than a decade in India, buoyed by strong growth in new business from both domestic and international customers. While developed economies are battling hard to tame inflation, India’s headline consumer price inflation has returned to within the central bank’s 2%-6% percent tolerance band.

The Covid years and the resultant disruption of supply chains due to China’s stringent policy sensitised the world to the pitfalls of overly relying on one country. Rising tensions between the US and China also mean companies are increasingly looking to diversify away from India’s larger neighbour. The “China-Plus-One-Strategy’’, where companies look to set up a manufacturing base in another country besides China, is beginning to receive a lot of attention from investors.

We are already seeing evidence of growing investments into India. Annual foreign direct investment1 has grown from $3.6 billion a decade ago to $46 billion in the fiscal year ending March 31, 2023. Foxconn, the world’s biggest contract manufacturer and a key supplier for Apple, plans to invest about $1.5 billion in India. Pegatron, another Taiwanese supplier to Apple, has already invested $150 million in manufacturing in India, and is in talks about opening another facility. Following a meeting with Prime Minister Narendra Modi during his state visit to the US, Tesla CEO Elon Musk said the electric carmaker will be in India “as soon as humanly possible.’’
Manufacturing, roads, airlines
While India’s standing as an offshoring 2 and international outsourcing3 centre is well known, the government’s $26 billion Production Linked Incentive scheme is providing impetus to its manufacturing sector. The scheme, covering 14 sectors including drugs and pharmaceuticals, food processing industries and medical appliances and electronics and communications, is helping in attracting foreign direct investment. This government policy is helping India to move up the value chain, exporting higher value-added products instead of traditional commodities.

Underpinning growth in manufacturing is a nationwide Goods and Services Tax, which was introduced more than five years ago to replace a complex web of state and local taxes. The cut in the effective corporate tax rate to 25.2% from 34.9% four years ago is expected to give a fillip to growth and profits. A special lower rate of 17% was also announced for new manufacturing companies. Rapid progress is also being made on building roads, supported by windfall taxes. The government has been building an average of about 24 kilometres of road per day and targets to increase the pace to 34 kilometres in 2024, aiming to complete 12,500 kilometres next year.

The optimism surrounding India’s prospects is no pie in the sky and is driven by robust consumer demand from an expanding middle class and a population with a high proportion of young people. Massive aircraft orders placed by Indian airlines are a case in point. IndiGo recently placed an order for 500 narrow-body planes from Airbus, the largest in the aircraft manufacturers’ history. This news came hot on the tail of Air India’s announcement of orders for 470 Boeing and Airbus jets.
Digital revolution
The numbers are even more staggering if one looks at the transactions generated each day under the United Payment Interface (UPI), a seamless payment system that connects banks, merchants and consumers through mobile devices. The UPI is part of a unique model for digitalisation of the economy, which is part of a public utility called IndiaStack.

India now handles more real-time payments between businesses than any other country, accounting for over 40% of such payments worldwide, according to the Morgan Stanley report. The number of transactions reached 9.4 billion in May 2023, almost four times the volume generated two years ago. Boston Consulting Group, in a report, forecast India’s digital payment market to more than triple to $10 trillion by 2027.

Open Network for Digital Commerce (ONDC) is another platform that’s part of IndiaStack that seeks to promote e-commerce, with even Amazon committing to join the network. We believe through this initiative the government is democratizing digital trade by breaking down barriers and creating alternatives to rent-seeking platforms.
Challenges: Politics, geopolitics, and climate change
To be sure, there could be headwinds to the India story as well. A tense standoff with China over a long running border dispute could escalate and force the government to divert resources to boost the country’s defences. High oil prices due to an uncertain geopolitical environment could also hurt India’s growth; it’s dependent on imports for about 80% of its energy needs.

India has enjoyed political stability over the past decade due to the majority enjoyed by Modi’s Bharatiya Janata Party. That could change if the national election next year throws up a coalition government, which could slow the pace of decision making. However, it’s important to remember that reforms that started in 1991 didn’t stall even when the political scene was dominated by coalition government in the 1990’s and 2000’s.

Rapidly changing weather patterns could be another challenge and may impinge on India’s agricultural sector. More than 50% of India’s population is dependent on farming although it contributes just a sixth to the overall output. Lower crop output may dent rural demand and slow growth.
Well positioned
Even so, we believe India’s prospects are much brighter than they ever have been. The power of compounding at a high rate on a high base means India will be one of only three economies in the world which can generate more than $400 billion in annual economic output growth from 2023 onwards, according to Morgan Stanley. A combination of capital spending by the government and private sector, favourable demographics, initiatives to boost both physical and digital infrastructure, strong consumer demand, and a need to diversify away from China are strong tailwinds for the Indian economy in the coming years. We are very optimistic for the outlook for India Inc. from here.
1 A category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy.
2 The movement off a business process of a company in one country to the same company in another country
3 The practice of engaging an external company in a foreign country to do another company’s work, usually as a cost-cutting measure

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