India is currently the fastest-growing major economy in the world and it is expected to become the world’s third-largest economy by 2032. It has the potential to eventually surpass China and the United States to become the “world’s largest economic superpower” by the end of this century. If high growth rates can be sustained, India is expected to overtake the US and become the world’s second-largest economy by 2075.
Can India sustain a high growth rate? There are two contrasting views on this, optimistic and pessimistic, and both views are well-grounded and backed by hard facts. Let us examine each one of them.
India has sustained a growth rate of over 6% for close to two decades now (the US, in comparison, grew at less than 2% average over the last decade). So, projecting a high growth rate of 6% or more for India for the next two decades is a realistic assumption. Sustaining that growth rate will help India become the largest economy. What will drive a high growth rate in India?
India’s key growth driver is its large youth bulge in a rapidly ageing world. China and the US have ageing populations, with a much higher share of non-working population. India will continue to benefit from a demographic dividend until 2055. Its demographic dividend and improving physical and human infrastructure has the potential to capitalise on cost advantage and sustain a high growth rate in both manufacturing and modern services sectors for decades to come.
India will also benefit from the largest consumer boom in the world, with the rise of the middle class. India’s middle class is expected to nearly double to 60% of its population by 2050 and become the largest in the world. Global consumer demand will no longer be just concentrated in Europe and the US, where the middle class has matured, and it has less demand. New households entering the middle class in India are a lot more dynamic and buy a lot more consumer durables. The rapid expansion in housing and shopping malls are all signs of a rapidly growing middle class. The demand for consumer durables -- cars, motorcycles, televisions, air conditioners, mobile phones, and refrigerators -- will continue to increase in the future. India will emerge with a middle class much larger than in the US today.
India has become a key player in a rapidly accelerating global talent race. There is a worldwide ‘war for talent’, and enterprises that manage their global talent pool well will march ahead. Some of the global economy’s most familiar institutions and enterprises, including the World Bank, Google, Microsoft, Alcoa, Clorox, Coca-Cola, McDonald’s, Pepsi, and Pfizer have immigrant CEOs from India. Nearly 70% of software engineers in Silicon Valley are foreign-born, mostly from India. The rapid rise in outsourcing of modern services to India has benefitted from diaspora connections. India’s economic integration with the world market is an important stepping stone, and this will remain strong
in the future due to strong diaspora connections.
India is also well-positioned to benefit from the next global revolution focused on the climate. India’s clean energy transition is rapidly underway, and it is particularly well-placed to become a global leader in renewable and green hydrogen. Wind power is India’s fastest-growing renewable energy source, and the fourth largest in the world. India’s installed solar energy capacity is 72.31 GW as of November 2023, a 30-fold increase in the last nine years. India’s goal is to have 500 GW of non-fossil electricity generation capacity by 2030, with solar and wind together making up 51% of that.
These and other low-carbon technologies could create a market worth up to $80 billion in India by 2030. India already ranks fourth in the world for renewable energy installed capacity -- hydro, wind power, and solar power -- and it has a bright future ahead.
Knowledge diffusion and innovation are no longer location specific but have become global in nature. Innovation and entrepreneurship will play a bigger role as drivers of growth in the future. It is estimated that 50% of the difference in per capita income between India and the US cannot be explained by investments in physical capital, but by the accumulation of knowledge and innovative capacity of the country.
India is well-positioned to benefit from the growing technology rivalry between China and the US, and the desire for forming new global supply chains. India is already recognised as a global hub for state-of-the-art R&D, with some of the brightest minds in the world, and offers a unique blend of massive market opportunity, technical competencies, and a highly scalable workforce. India will continue to benefit from increased policy focus on ‘innovation diplomacy’ in forging economic ties with other nations. The room for India to ‘catch up’ with the US is what will drive India’s fast pace of growth. This ‘convergence gap’ between India and the US remains huge, and there is big room for catch up.
India is also less exposed to the harmful effects of global downturns and rise in trade protectionism. Unlike China, India is less exposed to rising global trade disputes. While China is the global centre for manufacturing, India has acquired a global reputation as a hub for services export. The pace at which trade in services will grow will continue to outpace trade in goods in the future, given higher global cost differential in the production of services, and the ease with which modern services can be transported through the internet.
But a fast pace of growth cannot be taken for granted by India, given rising income disparities and lack of jobs.
Although India is likely to remain the fastest-growing large economy in the coming two decades, it cannot be taken for granted. India’s demographic dividend and the rise of the middle class is a time-bound opportunity. It provides policymakers an incentive to redouble their efforts to tap into its demographic dividend by improving physical and human infrastructure to sustain high growth and create jobs. India needs to create 200 million more jobs just to employ those who are of working age and seeking work.
(The writer is a senior fellow at the Pune International Centre. He has formerly worked with the United Nations and World Bank)