India to surpass U.S. as 2nd-largest economy

Goldman Sachs foresees India surpassing Japan, Germany, and even the United States to become the world’s second-largest economy by 2075, according to a recent report. At present, India ranks as the fifth-largest economy, trailing behind the US, China, Japan, and Germany.

The forecast is driven by several factors, including India’s growing population, advancements in innovation and technology, increased capital investment, and rising worker productivity. Goldman Sachs Research’s India economist, Santanu Sengupta, highlighted that India’s dependency ratio is expected to be one of the lowest among regional economies over the next two decades. The dependency ratio compares the number of dependents to the total working-age population, and a lower ratio suggests a greater proportion of working-age adults who can support the young and elderly.

Sengupta emphasised the importance of maximising India’s rapidly expanding population by boosting labour force participation. He predicted that India will maintain one of the lowest dependency ratios among major economies for the next 20 years. This period presents a window of opportunity for India to establish manufacturing capacity, drive service growth, and invest in infrastructure.

The Indian government has prioritised infrastructure development, particularly in road and rail networks. The recent budget proposed continuing interest-free loan programs for state governments, aiming to stimulate investments in infrastructure.

Goldman Sachs believes that the current time is ripe for the private sector to expand manufacturing and services, creating more jobs and accommodating the large labor force.

India’s technological progress and innovation are key drivers of its economic trajectory, as per the investment bank. According to Nasscom, India’s non-governmental trade association, the country’s technology industry revenue is projected to increase by $245 billion by the end of 2023, driven by IT, business process management, and software products.

Capital investment is also expected to contribute significantly to India’s growth, with rising savings rates, falling dependency ratios, increasing incomes, and deeper financial sector development. These factors are likely to expand the capital pool available for further investments, as highlighted in Goldman Sachs’ report.

However, the bank acknowledges certain risks to its projections. The labour force participation rate in India has declined in the past 15 years, particularly for women. A separate report by Goldman Sachs in June revealed that only 20% of working-age women in India are employed, potentially due to their engagement in informal piecework, which is not reflected in formal employment measurements.

India’s current account deficit, resulting from net exports, has also impeded its growth. Nevertheless, the bank noted that the current account balances have been cushioned by services exports.

India’s economy is predominantly driven by domestic demand, with up to 60% of its growth attributed to domestic consumption and investments, setting it apart from more export-dependent economies in the region, according to Goldman Sachs’ report.

Other financial institutions, including S&P Global and Morgan Stanley, have also predicted that India is on track to become the world’s third-largest economy by 2030.

India’s first-quarter GDP growth of 6.1% year-on-year exceeded expectations, outperforming experts’ forecasts of 5% growth. The country’s full-year growth for the current fiscal year is estimated at 7.2%, compared to 9.1% in the previous fiscal year (2021-2022).