India may emerge as the third largest economy in the world overtaking Japan in the coming ten years, according to a report by Bank of America Merrill Lynch. The report also said that falling dependency ratios, financial maturity and increasing incomes and affordability would be the key drivers that would lead to the country’s growth.
“We see India crossing Germany and Japan in nominal GDP in dollar term by 2028. This assumes that the Indian economy grows at 10 per cent (in nominal US GDP) in the next decade, well ahead of Japan’s 1.6 per cent,” the foreign brokerage report said. The report titled ‘India 2028: The last BRICK in the Wall’, has projected the country’s real GDP growth at 7 per cent potential and that India would emerge as the fifth largest economy of the world by 2019.
“First, falling dependency ratios should raise savings and investment rates. Second, financial maturity, due to financial liberalisation and inclusion, should continue to lower lending rates structurally. Finally, increasing incomes and affordability will likely underpin the emergence of mass markets, supporting an expected 7 per cent real GDP growth,” the report said.
It also said that the dependency ratio would be around 46.2 per cent that would in-turn help in sustaining the savings rate at 32 per cent of GDP, at the least, in 2028, comparable to 31.4 per cent during 2000-17. This increase in savings rate should push the rate of investment up to 35 per cent of GDP in 2028 from the current 32.4 per cent. “This, in turn, should lift growth to 10 per cent from 7.1 per cent last fiscal holding the incremental capital-output ratio at current 4.8 levels,” the report said.
“We continue to expect RBI to recoup forex reserves to guard against contagion, in contrast, to import cover almost halving since 2008. This should contain depreciation to 3 per cent a year over the next 10 years,” the report said. It also said that the credit to GDP ratio, a proxy for financial maturity, will likely climb to 83 per cent of GDP from 44 per cent (2001-17).
The bank report also suggested that the growth will be driven by the services and that mass markets powered by rising incomes, on the demand side, as well as economies of scale, on the supply side, would emerge.