India set to surpass Japan, Germany to become 3rd largest economy by 2030: S&P

India is likely to overtake Japan and Germany to become the world's third-largest economy by 2030 as its gross domestic product (GDP) is expected to touch $ 7.3 trillion, S&P Global Market Intelligence says in its latest PMI issue.

Currently, India is the 5th largest economy in the world at $3.7 trillion worth of GDP in 2023-24. It replaced the U.K. as the 5th biggest economy in 2022. After two years of rapid economic growth in 2021 and 2022, the Indian economy has continued to show sustained strong growth during the 2023 calendar year, S&P says.

"India's nominal GDP measured in USD terms is forecast to rise from USD 3.5 trillion in 2022 to USD 7.3 trillion by 2030. This rapid pace of economic expansion would result in the size of the Indian GDP exceeding the Japanese GDP by 2030, making India the second largest economy in the Asia-Pacific region. By 2022, the size of Indian GDP had already become larger than the GDP of the UK and also France. By 2030, India's GDP is also forecast to surpass Germany," writes Rajiv Biswas, Asia Pacific Chief Economist with S&P Global Market Intelligence, in a latest report titled "India's manufacturing output surges while inflation pressures ease".

Currently, China is the biggest economy in the Asia continent.

In terms of growth indicators, S&P says India's GDP growth rate rose to a pace of 7.8% y/y in the April-June quarter of 2023, compared with growth of 6.1% y/y in the January-March quarter of 2023. The private consumption grew by 6.0% y/y in the April-June quarter of 2023 from 2.8% in the previous quarter. Gross domestic fixed capital formation grew 8% in the April-June quarter; Construction output rose by 7.9% y/y in the April-June quarter of 2023 compared with the 10.4% y/y; the financial, real estate and professional services sector grew 12.2% YoY; India's industrial production grew 10.3% YoY in August 2023vs 6% in July. Manufacturing, electricity output, and output of capital goods also showed rapid growth.

After rapid economic growth of 7.2% in the 2022-23 fiscal year, economic momentum also has remained strong, with industrial production rising by 10.3% year-over-year (y/y) in August 2023 and GDP growth of 7.8% y/y in the April-June quarter of 2023. The S&P Global India Services PMI Business Activity Index for September also signalled "continued rapid expansion" for output and new orders, while the September Manufacturing PMI survey also showed "strong manufacturing operating conditions". The CPI inflation pressures also eased in September, with the headline CPI inflation rate moderating to 5.0% year-on-year in September, compared with 6.8% YoY in August.

The S&P says the near-term economic outlook for India is for "continued rapid expansion" during the remainder of 2023 and for 2024, underpinned by strong growth in domestic demand.

The acceleration of foreign direct investment inflows into India over the past decade reflects the favourable long-term growth outlook for the Indian economy, helped by a youthful demographic profile and rapidly rising urban household incomes, says S&P. "India has also become an increasingly attractive location for multinationals across a wide range of industries, with foreign direct investment inflows (FDI) having reached a new record high of USD 85 billion in the 2021-22 fiscal year."

The long-term outlook for the Indian economy, as per S&P, is supported by a number of key growth drivers -- large and fast-growing middle class, which is helping to drive consumer spending; and the rapidly growing Indian domestic consumer market and large industrial sector.

"The digital transformation of India that is currently underway is expected to accelerate the growth of e-commerce, changing the retail consumer market landscape over the next decade. This is attracting leading global multinationals in technology and e-commerce to the Indian market."

S&P says by 2030, 1.1 billion Indians will have internet access, more than doubling from the estimated 500 million internet users in 2020.

The ratings agency says overall, India is expected to continue to be one of the world's fastest-growing economies over the next decade, making India one of the "most important long-term growth markets" for multinationals in a wide range of industries, including manufacturing.

S&P had retained India's FY24 growth forecast at 6% in its September report, citing the slowing world economy, the delayed effect of rate hikes, and the rising risk of subnormal monsoons.