Why India may rise to become the world's second-largest economy

Government investment, a vibrant start-up ecosystem and the country's large population will help spur growth

High-rise buildings in Mumbai, the financial capital of India. The country is investing heavily in infrastructure. EPA

Goldman Sachs recently projected that India is poised to become the world’s second-largest economy by 2075. That may seem like a long way off but analysts say the country could achieve that even faster if it manages to address some of the hurdles that are holding it back from achieving its full growth potential.

While Goldman Sachs forecasts that China will overtake the US at around 2035 to become the biggest economy, India is set to surpass the US by 2075, as emerging economies expand faster than developed ones.

“Considering India's current growth rate and several challenges the US is grappling with – including an ageing population and a lack of home-grown skilled labour – I believe India has a realistic chance of overtaking the US sooner if its positive trends persist and the challenges in the US continue to intensify,” says Anirudh A Damani, the managing partner of Artha Venture Fund, a venture capital fund.

“India is in a unique position with one of the youngest large populations in the world. India could very well become the world's biggest producer and consumer of goods and services.”

India is currently the fifth-largest economy globally. It is expanding at a fast pace, however, and although the World Bank has trimmed the country’s growth forecast for the current financial year, it still projects India will be the fastest growing major economy globally, at 6.3 per cent.

Looking further ahead, with a population of more than 1.4 billion people, 66 per cent of whom are under the age of 35, Santanu Sengupta, Goldman Sachs research’s India economist, says that this demographic dividend will be a major driver of the country's growth over the coming decades in an economy that is largely driven by domestic consumption. Other factors which he says will help to accelerate growth include capital investment and digitalisation of the economy.

But he argues that India has some work to do to harness that potential.

“Favourable demographics will add to potential growth over the forecast horizon,” says Mr Sengupta.

“India’s large population is clearly an opportunity, however the challenge is productively using the labour force, by increasing the labour force participation rate. That will mean creating the opportunities for this labour force to get absorbed and simultaneously training and upskilling the labour force.”

He says that India will have one of the lowest “dependency ratios” globally for the next two decades – which refers to the older, non-working population that depends on the younger working population.

“So that really is the window for India to get it right in terms of setting up manufacturing capacity, continuing to grow services, continuing the growth of infrastructure,” says Mr Sengupta.

Brajesh Singh, the president of management consultancy Arthur D Little, India, says that the country’s “growth trajectory has captured the attention of economists worldwide, and there is growing optimism [it] could eventually become the world's second-largest economy”.

“One of India's greatest strengths is its large domestic market,” he says. “With a burgeoning middle class and increasing consumer spending power, India offers a massive customer base for both domestic and international businesses.”

Prashant Gupta, the chief executive of Sharda Group believes India’s large population provides the country with a high number of consumers and that consumption will drive growth.

India’s rising population “will provide a large pool of potential workers, consumers, and entrepreneurs”, says Mr Gupta.

Urbanisation will also be a significant driving factor of economic expansion, Mr Gupta says.

Official data shows that only one-third of the country live in urban areas, but by 2050, 60 per cent of the population is expected to reside in urban India.

“This urbanisation will lead to increased demand for goods and services, which will boost economic growth,” says Mr Gupta.

Sectors that will underpin India's economic expansion include consumer goods, manufacturing, and IT, he says. Other industries including financial services and logistics are also set to play an increasingly important role in the economy, he adds.

A continued focus on boosting manufacturing in the country and ploughing much-needed investment into India's infrastructure – including roads and airports - will also be vital for India's economic expansion, experts say.

“Consistent investment in manufacturing and infrastructure has been catalytic in boosting India's output and trade, enhancing its global economic standing,” says Mr Damani.

“The country's focus on building a robust manufacturing sector and improving infrastructure underscores its commitment to sustainable economic growth. This will inevitably contribute to India's rise as a major global economic player.”

Still, despite its economic potential the country needs to address several challenges that could hold back its economic growth potential.

These include the country's deep economic inequality, the need for better infrastructure, widespread corruption, as well as the skills gap in India, says Mr Gupta.

“The main downside risk would be if the labour force participation rate does not increase,” says Goldman Sachs' Mr Sengputa.

“The labour force participation rate in India has declined over the last 15 years. If you have more opportunities - especially for women, because the women’s labour force participation rate is significantly lower than men’s - you can shore up your labour force participation rate, which can further increase your potential growth.”

Akash Shukla, the founder of Uprise India, an organisation promoting self-employment of women, says that, in particular, the participation of women in rural areas can play an important role, and is an area in which progress is being made.

But, he says, “we must acknowledge that there is still work to be done in integrating a significant portion of our rural economy into the broader Indian economic landscape”.

“By ensuring financial inclusion for these segments, we can expedite our journey towards becoming the largest economy, achieving our goals much earlier than originally projected, perhaps even before 2075,” says Mr Shukla.

As a developing economy, there is still much to be done.

“Efforts to modernise agriculture and rural development contribute to inclusive growth,” says Abhijit Chokshi, the founder of Stockifi, a Mumbai-based financial advisory firm, but he adds “poverty and infrastructure gaps remain a hurdle.”

As Goldman Sachs also highlights, India will also have to meet its growing energy needs, he says.

“The country's commitment to renewable energy transition promotes sustainability and creates green jobs.”

At the same time, global trends will also inevitably be an enormous influence on India’s economic growth trajectory, along with many variables domestically, analysts say.

Anshu Kapoor, the president and head of Nuvama Asset Management, says that the large demographic dividend will be a key factor in driving the country’s economic growth, there are other favourable elements.

The most significant of these include government initiatives to digitalise the economy through its Unified Payments Interface (UPI), an instant payment system.

The country’s vibrant start-up ecosystem and government investment in infrastructure and manufacturing through various production-related schemes that spur commerce and promote self-sufficiency are other positive factors.

“By focusing on education, skill development, and job creation, India can harness this demographic dividend to drive economic growth,” says Mr Singh.

With such “efforts, policy reforms, and sustained investment, India can move closer to becoming the world's second-largest economy, contributing to global growth and development”.