India To Become World's 3rd Largest Economy By...: Morgan Stanley's Bullish Take

India is poised to become the world’s third-largest economy by 2028, according to a new report by Morgan Stanley. The country, which is already the fifth-largest economy in 2023, is expected to outpace Germany, reaching a $5.7 trillion economy by 2028. This growth is driven by factors such as macroeconomic stability, improved infrastructure, and an increasingly prominent consumer market.

India’s economic journey has seen notable milestones. In 1990, India ranked 12th, slipping to 13th by 2000. However, by 2020, it climbed to 9th place, and today it holds the 5th position. By 2029, India’s share of global GDP is projected to rise from 3.5% to 4.5%.

Growth Projections: Three Possible Scenarios
Morgan Stanley projects three potential scenarios for India’s economic growth. In a bear scenario, the Indian economy will grow to $6.6 trillion by 2035. In the base scenario, the economy expands to $8.8 trillion. And in a bull scenario, India's GDP surges to $10.3 trillion.  In all scenarios, GDP per capita is expected to rise significantly, from $2,514 in 2025 to between $4,247 and $6,706 by 2035, depending on the scenario.

Drivers Of Growth
India's impressive economic rise is underpinned by several critical factors, including a robust population growth, a functioning democracy, and macro-stable policies. Additionally, the country’s improving infrastructure and a growing entrepreneurial class are expected to play significant roles in expanding India’s global economic footprint. The nation is projected to become the world’s most sought-after consumer market, with major advancements in energy transition and manufacturing expected.

Growth Recovery on the Horizon
While growth in India has shown mixed indicators recently, Morgan Stanley expects a recovery in the second half of 2024. The recovery is anticipated to be supported by fiscal and monetary policy measures and a rebound in service exports. The report also predicts a GDP growth of 6.3% for the current fiscal year, with an increase to 6.5% in the next.
Domestic consumption, bolstered by income tax cuts and rural demand, is expected to be the main driver of economic growth. Public and household capital expenditure, alongside recovering private corporate investments, will provide additional momentum.

Inflation and Monetary Policy Outlook
Inflation in India has cooled from its recent peak, with the headline Consumer Price Index (CPI) tracking near 4%, driven by moderating food prices. Core inflation remains stable, and the Reserve Bank of India (RBI) is expected to ease monetary policy further, including a possible rate cut in the April policy meeting. The current account deficit is expected to remain manageable, staying below 1% of GDP in FY 2025-27, indicating resilience in India’s external balance.

Fiscal Policies and Risks to Growth
Morgan Stanley commended India’s fiscal policies, which focus on supporting growth recovery through tax cuts and increased capital expenditure. However, risks to growth remain, particularly from external factors such as global trade policies, a strengthening US dollar, and potential global recessions. Domestically, risks could arise from fiscal imbalances at the state level or changes in policy that could affect macro stability.