India is projected to surpass the United States to become the world's second-largest economy by 2075 as the country's GDP expands dramatically aided by favourable demographics, according to Goldman Sachs Research.

For India, a key to realising the potential of that growing population is boosting participation within its labour force, as well as providing training and skills for its immense pool of talent, says Santanu Sengupta, Goldman Sachs Research's India economist.

"Over the next two decades, the dependency ratio of India will be one of the lowest among regional economies," he says, pointing out that India's population has one of the best ratios between its working-age population and its number of children and elderly. "So that really is the window for India to get it right in terms of setting up manufacturing capacity, continuing to grow services, continuing the growth of infrastructure."

India has made more progress in innovation and technology than some may realise, Sengupta says. "Yes, the country has demographics on its side, but that’s not going to be the only driver of GDP. Innovation and increasing worker productivity are going to be important for the world's fifth-biggest economy. In technical terms, that means greater output for each unit of labor and capital in India’s economy," he says.

Capital investment is also going to be a significant driver of growth going forward. Driven by favorable demographics, India's savings rate is likely to increase with falling dependency ratios, rising incomes, and deeper financial sector development, which is likely to make the pool of capital available to drive further investment, says Sengupta.

"On this front, the government has done the heavy-lifting in the recent past. But given healthy balance sheets of private corporates and banks in India, we believe that the conditions are conducive for a private sector capex cycle," he adds.

Favourable demographics will add to potential growth over the forecast horizon, says Sengupta. "India's large population is clearly an opportunity, however the challenge is productively using the labor force, by increasing the labor force participation rate. That will mean creating the opportunities for this labor force to get absorbed and simultaneously training and upskilling the labor force," he says.

"The population growth will continue. What we focus on is the dependency ratio, which is the non-working-age population that is dependent on the working-age population. For India, that will be among the lowest among large economies for the next 20 years or so. So that really is the window for India to get it right in terms of setting up manufacturing capacity, continuing to grow services, continuing the growth of infrastructure," he says.

There's a lot of infrastructure creation that is going on now, primarily led by the government's focus on setting up infrastructure in terms of roads, railways and so forth, the Goldman Sachs' economist says. "We believe this is also the appropriate time for the private sector to scale up on creating capacities in both manufacturing and services which has the potential of creating jobs and absorbing the large labor force," he adds.

The main downside risk would be if the labour force participation rate does not increase, Sengupta cautions. "The labor force participation rate in India has declined over the last 15 years. If you have more opportunities — especially for women, because the women's labor force participation rate is significantly lower than men's — you can shore up your labor force participation rate, which can further increase your potential growth," he says.

world's second largest economy

India will be world's second-largest economy by 2075, says Goldman Sachs