Goldman Sachs: India Will Become The World’s Second Largest Economy By 2075

Realizing India’s continuously growing population potential relies on increasing workforce participation and providing training and skill development opportunities for its enormous talent pool. India is projected to have one of the lowest dependency ratios among regional economies in the next two decades. Sengupta highlights India’s advantage of a favorable labor-age population ratio compared to children and the elderly, which opens a window of success for India in building manufacturing capabilities, expanding the service sector, and developing infrastructure.

While India’s population structure presents advantages, it is not the sole driver of GDP growth. Innovation and enhancing labor productivity are crucial for the world’s fifth-largest economy. This means achieving greater output per unit of labor and capital in India’s economy.

Capital investment also plays a significant role as a driving force for future growth. With favorable demographics, India’s savings rate is expected to rise due to declining dependency ratios, increasing incomes, and deeper development of the financial sector. This provides a pool of capital for further investment. The private sector is well-positioned to contribute to the capital expenditure cycle, given the healthy balance sheets of private corporates and banks in India.

Leveraging favorable population statistics will contribute to potential growth within the forecast period. India’s significant population presents an opportunity, but the challenge lies in effectively utilizing the workforce by increasing labor force participation rates. This calls for creating opportunities to absorb the workforce, along with training and upskilling the labor force.

India’s population structure transition is slower and more prolonged compared to other Asian countries, mainly due to slower declines in birth and death rates.

Population growth will continue, with a focus on the dependency ratio, which measures the extent of non-working-age population dependence on the working-age population. In the next 20 years, India is expected to have one of the lowest dependency ratios among major economies, providing a favorable environment for building manufacturing capabilities, further developing the service sector, and continuing infrastructure development.

India is currently engaged in significant infrastructure development, with a particular focus on roads, railways, and other key areas. This presents an appropriate time for the private sector to expand manufacturing and service sector capacities, creating employment opportunities and absorbing a large workforce.

The primary downside risk lies in the failure to increase labor force participation rates. Over the past 15 years, India has witnessed a decline in labor force participation, especially among women. Enhancing labor force participation, particularly for women, can further boost India’s potential growth.

Upside potential for growth can be achieved through higher productivity growth. India has made remarkable strides in economic digitization, leveraging widespread internet and mobile internet penetration. Additionally, the Aadhaar system, the world’s largest biometric identification system, enables online and physical verification of the identities of India’s 1.4 billion population, making the provision of public services easier and more targeted. The Aadhaar system has expanded credit networks, facilitating increased credit access for small businesses, which contributes to productivity growth and creates space for upward growth.

In contrast to many other countries, India’s growth is primarily driven by domestic consumption, which accounts for approximately 55-60% of the overall economy, along with domestic investment. India’s economic growth has been constrained by a persistent current account deficit and net exports. Recent progress has been observed, with an increase in service exports partially offsetting the current account balance.

It’s important to consider how commodity prices impact macroeconomic indicators such as inflation, fiscal deficits, and current account deficits. India imports a significant amount of commodities to meet the population’s needs, and when global commodity prices rise, it can lead to macro imbalances. However, in recent years, these imbalances have reduced, along with a decrease in macroeconomic vulnerabilities, primarily through inflation targeting and buffering the current account balance through service exports.

India’s large population drives substantial energy demand. Although per capita energy consumption is much lower compared to the Western world and other emerging economies, the significant population translates to substantial energy import costs, resulting in a current account imbalance for India.

India has set ambitious goals to achieve net-zero emissions by 2070 and generate 50% of its power from non-fossil sources by 2030. The government is also promoting electric vehicles and green hydrogen, targeting a renewable or clean energy capacity of 500 GW by 2030.

Ultimately, transitioning to green energy presents significant investment opportunities, although it will take time. During this transition period, fossil fuels will continue to account for a significant portion of India’s energy demand.

India’s bright economic future hinges on factors such as enhancing workforce participation, innovation, capital investment, and leveraging its favorable population structure. While risks exist, addressing them and focusing on productivity growth and sustainable development will help India realize its economic potential.