December , 2022
India is projected to drive global economic growth
00:12 am

Tushar K. Mahanti

India is on track to become the world’s third largest economy by 2027, edging past Japan and Germany, says a new Morgan Stanley research report. India will account for a fifth of total global economic growth in the next decade.

The expanding volume and the vast scale of India’s economy will be the key driver of this surge, the global investment bank has added. The report titled ‘Why This is India’s Decade’ underlines the trends and policies driving the future of the country’s economy.

According to the report, India's GDP is set to double from the current $3.4 trillion to $8.5 trillion over the next decade. "India will add more than $400 billion to its GDP every year, a scale that is only surpassed by the US and China," the report claimed.

India is already the fastest-growing economy in the world, having grown at an average 5.5% over the past decade. India’s real GDP growth will average 6.5% in the coming decade while China’s will average 3.6%, the report has said. Four major trends— demographics, digitalisation, decarbonisation and deglobalisation — are likely to facilitate India's rapid rise.

The growth will have a further boost with Indian consumers having more disposable income. India’s income distribution could flip over the next decade, and consequently overall consumption in the country could more than double from $2 trillion in 2022 to $4.9 trillion by the end of the decade. The biggest gainers of this consumption expansion will be non-grocery retail including apparel and accessories, leisure and recreation and household goods and services.


India is the fastest growing major economy


Apparently, the Morgan Stanley forecast looks optimistic, although the investment bank has cautioned that these projections are underpinned with favourable domestic and global macroeconomic trends. Domestically, it is important to have a policy shift from redistribution and freebies to boosting investment and job creation. On the external front, India would need to explore newer markets to expand its merchandise exports.

Whether India will drive a fifth of world economic growth is a future proposition depending on several factors as the Morgan Stanley report has mentioned. But what is important is that amidst a decelerating global economy, India has once again turned into the fastest growing major economy.

And although IMF has revised downward India’s GDP growth projection by 0.6 percentage points in its October 2022 report relative to its June 2022 projection following a weaker output in the second quarter and subdued external demand, but at 6.8% projected growth India is way ahead of other major economies. “India has been doing fairly well in 2022 and is expected to continue growing fairly robustly in 2023,” the IMF’s chief economist, Pierre-Olivier Gourinchas has said recently.

Rating agency Moody’s has cut India’s growth projection for the current year to 7% from 7.7% earlier. India’s central bank too has revised downward its growth projection for the current year to 7% from 7.2% earlier. That is, although Moody’ or the RBI has slashed India’s growth projection, the forecast at 7% is still far above those of the major economies.

The global GDP growth will slow down from 6.0% in 2021 to 3.2% in 2022 and further to 2.7% in 2023, the IMF has projected. This is reflective of the GDP contraction of the US in the first half of 2022, a Euro Area contraction in the second half, extended Covid-19 outbreaks in China and associated lockdown and a property sector crisis.

The US is expected to grow at 1.6% this year followed by a slowing down to 1.0% growth next year. The Euro Area is projected to grow 3.1% this year and 0.5% next, while China is forecast to grow at 3.2% this year followed by a 4.4% next year.

The Conference Board, a global independent research association, headquartered in New York, forecasts in a report last November that economic weakness will intensify and spread more broadly throughout the US economy over the coming months with a recession to begin around the end of December, 2022. The Board has predicted the US real GDP to grow by 1.8% year-over-year in 2022. However, the annual inflation rate in the US has slowed down for the fourth month to 7.7% in October, the lowest since January, 2022. The inflation rate was 8.2% in September.




GDP growth projections (%)


               I M F

      World Bank











Adv economies










Euro Area










Emerging Mkts





















Source: Global Economic Prospects, June  2022 - World Bank

and World Economic Outlook ,October 2022- IMF



In contrast to the US, the Euro Area’s inflation rose further last October. According to a flash estimate from Eurostat, the statistical office of the European Union, the inflation rate in October was 10.7% against 9.9% in September. Energy prices increased to 41.9% in October against 40.7% in September.

Like the US, the fear of recession is looming large in the Euro Area too. And if the European Commission’s Summer Interim Forecast has predicted the Euro Area’s GDP to grow by 3.2% in 2022, it has likewise cautioned that the GDP growth would come down to 0.3% next year.

According to the ‘World Economic Outlook Report, October, 2022 of IMF the global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The rising cost of living, the tightening financial conditions in most regions, Russia’s invasion of Ukraine and the lingering Covid-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the Covid-19 pandemic.

Global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy, the IMF has suggested. Structural reforms can further support the fight against inflation by improving productivity and easing supply constraints, while multilateral cooperation is necessary for fast-tracking the green energy transition and preventing fragmentation, the IMF report has suggested.

The World Bank too in October cut its 2022-23 (FY23) real gross domestic product (GDP) growth forecast for India to 6.5%, from an earlier estimate of 7.5%, while warning that spillovers from Russia's invasion of Ukraine and global monetary tightening will weigh on the economic outlook. But despite the cut in projection, India’s growth forecast remains much higher than the world at large. The World Bank has projected the global GDP to grow by 2.9% in 2022 and by 3% in 2023.


India’s macro indicators

Echoing Morgan Stanley’s report, a recent SBI research study too has said that following large scale structural changes since the last decade India would surpass Germany in 2027 and Japan in 2029 to become the world’s third largest economy. The share of India’s GDP in global total has increased from 2.6% in 2014 to 3.5% now. India’s resilience to fight adverse global situations is a key factor in achieving higher growth.

In a recent speech, the RBI Governor Shaktikanta Das too has claimed that “in this unsettling global environment, the Indian economy has been growing steadily, drawing strength from its macroeconomic fundamentals and buffers.” India’s economic recovery and growth have been more broad-based and policies – fiscal, monetary, and regulatory – were prudent, targeted and time-bound. India took care to ensure that demand remained in balance while supply conditions improved, the Governor has claimed. According to Das, “As per the high frequency indicators (HFIs) for the recent months, private consumption – especially urban demand – has remained healthy. The contact-intensive services have continued to make a smart rebound, aided by unfettered resumption of activities and full-fledged celebration of festivals after two and half years. External demand, however, remains a weak spot in the face of accentuating global economic slowdown.”

What, however, would be a cause of concern is that according to the government's estimates, the country's rice production is set to see a decline in the kharif season this year. There is likely to be a six percent decline. The Agriculture Ministry's first advance estimate sees the kharif crop for the 2022-23 year dropping to 104 million tonnes in 2022-23 from 111 million tonnes a year ago.

But while the agriculture sector is doing somewhat poorly this time, the manufacturing sector seems to make up for some of this loss. The S&P Global India Manufacturing PMI increased to 55.3 in October 2022 from 55.1 in September, exceeding expectations. October data showed historically marked expansions in factory orders and quantities of purchases, while production growth outpaced its long-run average despite softening to a four-month low. Indian manufacturing companies also bought additional inputs in October following efforts to rebuild stocks and fulfil greater sales. The hiring in the sector increased at a marked rate that was one of the strongest since data collection started in March 2005.

Reflecting the trend, the industrial output during the first six months of the current fiscal, between April and September, 2022, has grown 7% over the same period of last year. The output of the capital goods sector has grown by 16.8% indicating that Indian businesses expect more demand and that the economy will grow further. The manufacturing output has grown by 6.8% while power generation has grown by 10.8% during this period.

India is also set to become the factory of the world as corporate tax cuts, investment incentives and increasing spending on infrastructure projects are driving capital investment in manufacturing.  “Multinationals are now buoyant about the prospects of investing in India, and the government is helping their cause by investing in infrastructure as well as supplying land for building factories,” says Morgan Stanley report. Manufacturing's share in GDP in India could increase from 15.6% currently to 21% by 2031 and in the process would double India's export market share.


Challenges before India


Failure to control the inflationary pressure is probably the most important adversary of India’s growth rebound. While rising inflation has affected consumer demand it has also compelled RBI to raise interest rate consistently making capital costlier. Although retail inflation eased to 6.8% in October from 7.4% in September, it remained more than one percentage point above RBI's upper target range of 6%. The RBI has raised the key repo rate by 140 basis points so far this year to check inflationary pressures.

Inflation in India is "unacceptably and uncomfortably" high, the RBI Governor Shaktikanta Das said in minutes of the Monetary Policy Committee's (MPC) meeting in August. However, he admitted that it is likely to be two years before inflation comes to the target of 4% and remains there on a sustained basis as many factors and uncertainties are at play.



Retail inflation (%)



































Source: National Statistical Office


Another challenge is the continuing outflow of foreign capital. For the past ten months, foreign portfolio investors (FPIs) have been on a heavy selling spree in the Indian financial markets. According to data compiled by the National Securities Depository, the total outflow by Foreign Portfolio Investors (FPIs) has reached ₹ 1.75 lakh crore so far in 2022.

The outflow by FPIs was largely driven by the concerns of the monetary policy tightening by the US Fed as well as other central banks globally, which could hamper global economic growth.

One of the adverse consequences of the capital outflows is the continuous weakening of the Indian rupee. The rupee has lost 7.7% against the US dollar in the current fiscal. As per the RBI reference rate, the rupee was quoted at 81.77 per dollar on November 22, 2022 against 75.95 on April 1.

The continuous decline in Indian currency has also adversely affected the country’s foreign exchange reserves. So far in the current fiscal, India’s forex reserves have fallen by more than 10% from $ 606.48 billion on April 1, 2022 to $ 544.72 billion on November 11.

Another cause of concern is the increase in the current account deficit. Although the RBI governor claims that India’s external sector has weathered the storm while navigating through the recent global spillovers, the merchandise trade deficit has increased sharply. Merchandise exports grew to $263.35 billion in April-October 2022 from $ 233.98 in the same period last year. But the merchandise imports surged to a record high on the back of elevated global commodity prices – up from $328.14 billion in April-October 2021 to $436.81 billion in April-October 2022. Consequently, the merchandise trade deficit has nearly doubled from $ 94.16 billion during April-October to $ 173.46 billion now.

The RBI, however, is confident that the current account deficit could be contained at 3% of GDP in the current year. The SBI research too has remarked that “India’s CAD has a countercyclical shock absorber. For every rupee depreciation, software exports up by $ 250 million. Limits India’s CAD -3% of GDP in FY23”, says SBI research report Ecowrap.

Although India’s economy is growing, poverty is still a major challenge. According to the World Bank, extreme poverty had reduced by 12.3% between 2011 and 2019 from 22.5% in 2011 to 10.2% in 2019. But Covid-19 pandemic, which saw millions of workers losing jobs, reversed the trend. A total of 5.6 crore Indians slipped into poverty in the pandemic year of 2020, the World Bank said in a report citing data from a household survey conducted by CMIE.

The RBI governor sounded warning bells about the rising inequality brought forward by the pandemic in the country and remarked that “history shows that the impact of pandemics, unlike financial and banking crises, could be a lot more asymmetric by affecting the vulnerable segments more. The COVID-19 pandemic is no exception.”


Post script

The claims of Morgan Staley and SBI that India would become the world’s third largest economy by the turn of the decade would make New Delhi very happy. But this would need, among other things, a huge investment in industry, particularly from the private sector. Recent data on investment, however, do not suggest any big leap there. During the first quarter of the current fiscal FDI inflows to India has fallen to $ 16.58 billion from $ 17.67 billion in the same quarter a year ago.


Industrial Entrepreneur Memorandum



Upto Aug 2022

No of IEM filed



Proposed inv (Rs crore)



No of IEM implemented



Investment (Rs crore)




Source: Ministry of Commerce and Industry, GOI


Number of industrial entrepreneur memorandum filed and proposed investment therein, which indicate investment intention, have declined as also the number of IEM implemented. The number of IEM implemented too has declined. The investment has nearly halved during this period. These are not good statistics if India needs to lead global growth.


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