India could become third largest economy by 2030, overtaking Japan and Germany

India is expected to overtake Japan and Germany to become the world’s third-largest economy, according to S&P Global and Morgan Stanley.

The S&P forecast is based on the projection that India’s annual nominal gross domestic product growth will average 6.3% through 2030. Similarly, Morgan Stanley estimates that India’s GDP is expected to grow more than double from current levels by 2031.

“India has the conditions in place for an economic boom fueled by offshoring, investment in manufacturing, energy transition and the country’s advanced digital infrastructure,” Morgan Stanley analysts led by Ridham Desai and Girish wrote. Acchipalia in the report.

“These pilots will [India] the third largest economy and stock exchange in the world before the end of the decade.”

India posted year-on-year growth of 6.3% for the July-September quarter, slightly better than a Reuters poll forecast of 6.2%. Earlier, India recorded a 13.5% expansion from April to June from a year ago, supported by robust domestic demand in the country’s services sector.

The country recorded record growth of 20.1% year-on-year in the three months to June 2021, according to data from Refinitiv.

S&P’s projection depends on India’s continued trade and financial liberalization, labor market reform, as well as investment in India’s infrastructure and human capital.

“It’s a reasonable expectation from India, which has a lot to ‘catch up on’ in terms of economic growth and per capita income,” Australia and New Zealand economist Dhiraj Nim told CNBC. Banking Group Research.

Some of the reforms cited have already been implemented, Nim said, underscoring the government’s commitment to earmarking more capital spending in the country’s annual expenditure books.

According to S&P analysts, the Indian government is clearly aiming to become a hub for foreign investors as well as a manufacturing powerhouse, and its main means of achieving this is through the production-linked incentives program to boost manufacturing and exports.

The so-called PLIS, which was introduced in 2020, offers incentives to domestic and foreign investors in the form of tax refunds and license clearances, among other stimulus measures.

“It is highly likely that the government is banking on the PLIS as a tool to make India’s economy more export-oriented and more interconnected in global supply chains,” the S&P analysts wrote.

Similarly, Morgan Stanley estimates India’s manufacturing share of GDP ‘will rise from 15.6% of GDP currently to 21% by 2031’ – implying industry revenue could triple , rising from the current $447 billion to around $1.490 billion, according to the Bank.

“Multinationals are more optimistic about investment in India than ever before…and the government is encouraging investment by both building infrastructure and providing land for factories,” Morgan Stanley said.

“The assets of India [include] abundant cheap labor, low cost of manufacturing, openness to investment, business-friendly policies and a young population with a strong consumer bent,” said Sumedha Dasgupta, senior analyst of the Economist Intelligence Unit.

These factors make India an attractive choice for setting up manufacturing hubs until the end of the decade, she said.

Key sticking points that could challenge Morgan Stanley’s forecast include a prolonged global recession, as India is a heavily trade-dependent economy with almost 20% of its production exported.

Other risk factors cited by the U.S. investment bank include the supply of skilled labor, adverse geopolitical events and policy errors that may arise from voting in a “weaker government.”

A global slowdown could weigh on the outlook for India’s export businesses, India’s finance ministry said last Thursday.

Even though India’s overall GDP is already above pre-Covid levels, the growth forecast will be “much weaker” compared to previous quarters, said Sonal Varma, chief economist at Nomura.

“Real GDP is now 8% above pre-Covid levels in terms of growth rate … but in terms of the forward view, there are headwinds on the side of global financial conditions,” Varma told Squawk on Thursday. CNBC’s Box, warning that there was will be a cyclical downturn ahead.

Similarly, Nim also said that greater priority could be given to investing in human capital through education and health.

“This is particularly important for a post-pandemic economy where greater disruptions to the informal sector have led to widening economic and wealth inequality,” he said, adding that declining labor force participation rates , particularly among women, was of concern.