In November 2017, just around the time India had overtaken Brazil and Russia to emerge as the second largest economy in the BRICS grouping after China, Indranil Sen Gupta and Aastha Gudwani, both economists at the brokerage firm, BofA Securities India (BofAS India), had pointed out that India could emerge as the third largest economy in the world by 2028.

BRICS is the economic bloc consisting of Brazil, Russia, India, China, and South Africa. Owing to lower labour and production costs, economists have been of the view that BRICS would be the dominant global suppliers of raw materials and manufactured goods and services by 2050.

Coming back to the India forecast for 2028, the BofAS India economists had counted three key drivers for the projected growth: one, coming demographic dividend which was expected to reduce dependency ratios while raising savings and investment rates. Two, growing financial maturity due to financial liberalisation and inclusion which was seen to structurally lead to lower lending rates. And, three, the emergence of mass markets with increasing incomes and affordability.

Together, in Sen Gupta and Gudwani’s view, these three drivers were seen to support an expected 7% real GDP growth in India. However, with the Covid-19 shock during 2020, the duo now expects a three-year delay in India’s emergence as the world’s third largest economy to 2031 or FY2032, from the earlier 2028.

In their view, India should touch Japan's nominal GDP (in U.S. dollar terms) by 2031 if 9% GDP growth is clocked; and if the Indian economy grows at a rate of 10%, then it could occur a year early, i.e. by 2030. “This assumes an entirely realistic 6% real growth, 5% inflation and 2% depreciation (in currency),” Sen Gupta and Gudwani say.

In their latest projection, the drivers flagged in 2017 continue to be relevant. While the economists find all three phenomena strengthening, just as importantly, they see two further catalysts that would support structural change. “The Reserve Bank of India (RBI) has effectively attained a silent revolution in re-achieving adequacy of foreign exchange (FX) reserves after almost eight years,” the duo note. “This should help stabilise Indian Rupee (INR) by de-risking the Indian economy from global shocks.”

Also, they see the sustained easing by the RBI finally bringing down real lending rates that have been a drag on growth since 2016. “We continue to see financials as the primary beneficiary of the India growth story,” they add.

On the earlier three drivers, the two economists see the dependency ratio to fall to about 41.2% in 10 years from 44.2% at present. The credit-to-GDP ratio, a proxy for financial maturity, in the duo’s view, should climb to 102% in FY2032 from 44% in 2001-2017, and 25% during the 1980-90s. And, on the emergence of mass markets, they forecast that the price of an entry level car will be one times of per capita income by 2028, from 2.45 times now, and 14 times in 2000.

The duo note that their eight–year call of the RBI rebuilding FX reserves is finally coming true. “After all, they are surely India's only insurance cover against contagion,” they argue. With RBI governor Shaktikanta Das buying at every opportunity, FX reserves are back to the $550 billion plus level, which the duo sees as adequate.

With stronger FX reserves, large currency depreciations during global shocks, like 2011, 2013, and 2018, should be a thing of the past. A proof of the pudding: the INR has already outperformed during the Covid-19 shock. Also, markets will likely see greater portfolio inflows going ahead as adequate FX reserves cut INR risks. “Finally, Indian corporates should be able to raise money abroad cheaper,” Sen Gupta and Gudwani add.

Softer real lending rates, the second new catalyst, would support higher growth. The duo feel relieved that real lending rates are coming off in response to sustained interest rate easing by the central bank. “After all, we have argued that rising real lending rates have hurt growth since 2016,” they note. Sen Gupta and Gudwani highlight that the real marginal cost of funds-based lending rate (MCLR) is down 384 basis points (100 basis points make a per cent) since March 2019, especially with core wholesale price index (WPI) inflation normalising to 4.7% from 2.3% in March 2019.

On the macro front, the BofAS India economists argue that the recent reforms under Prime Minister Narendra Modi’s AtmaNirbhar Bharat programme, if successful, pose 50-100 basis points upside risk to their growth estimates. The duo also welcomes the formation of a development bank—National Bank for Financing Infrastructure and Development (NaBFID), which was announced in Union Budget 2021.

Interestingly, on March 22, finance minister Nirmala Sitharaman introduced the NaBFID Bill 2021 in the Lok Sabha to pave the way for setting up the government–owned development financial institution that could raise infra bonds worth over ₹5 lakh crore in three years, as extra budgetary resources to aid infrastructure investment. Also, the bank asset reconstruction company (ARC) announced in the Budget would play a critical role in resolving public sector banks’ non–performing assets (NPA) problems. The two economists assume that this will focus on banks’ net NPAs of 1.3% of GDP.

While the going looks good, crude oil price of $100–plus per barrel can pose a downside risk to India's growth prospects, as well as the 2031 projection. “We think that sustained $100–plus per barrel oil would push the current account deficit (CAD) beyond the sustainable 2% of GDP level, and pose a downside risk,” Sen Gupta and Gudwani note.

The duo places the FY22 CAD at 0.8% of GDP at $60 per barrel. In their view, every $10 per barrel increases the CAD by $9 billion, or 0.3% of GDP. “If oil rises above the sustainable level, it will also typically dry up foreign portfolio investor (FPI) flows that will move from oil importers to oil exporters,” the duo adds.

Overall, the Indian economy is poised to have an interesting decade ahead with a fair mix of growth enablers and challenges working in tandem.

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