Unlocking India’s Economic Potential: A Path to Become the World’s Second-Largest Economy

India, with its population of 1.4 billion, is poised to become the world’s second-largest economy by 2075, according to projections by Goldman Sachs Research. The key to realizing this potential lies in boosting labor force participation and providing training and skills to India’s vast talent pool. This blog post delves into the drivers behind the long-term forecasts for India’s economy, the role of demographics, and the country’s ambitions for green energy.

1. Drivers of India’s Economic Growth: While favorable demographics provide an advantage, India’s progress in innovation and technology is a crucial driver of GDP growth. Increasing worker productivity and capital investment are also key factors. India’s savings rate is expected to rise with falling dependency ratios, rising incomes, and deeper financial sector development, which will fuel further investment. The private sector, supported by healthy balance sheets, is poised to contribute to the capital expenditure cycle.
2. Demographic Dynamics: India’s demographic transition is happening gradually compared to other Asian countries, with a slower decline in death and birth rates. The focus lies on the dependency ratio, which measures the non-working-age population dependent on the working-age population. India’s dependency ratio is projected to be among the lowest among major economies for the next two decades, providing a window of opportunity for setting up manufacturing capacity, expanding services, and investing in infrastructure.
3. Risks to Economic Growth: One of the main risks to India’s economic growth is the declining labor force participation rate, especially among women. Increasing opportunities and addressing gender disparities can bolster the labor force participation rate and enhance overall growth. Upside growth can be achieved through higher productivity, aided by digitalization and the unique identification system (Aadhaar), which facilitates targeted service delivery and credit access.
4. Key Factors Shaping India’s Economy: India’s economy is primarily driven by domestic demand and investments, with domestic consumption accounting for a significant portion. However, net exports have been a drag on growth due to India’s current account deficit. Recent progress has been made, with increasing services exports helping cushion current account imbalances. Commodity prices, particularly energy, have an impact on macroeconomic factors such as inflation, fiscal deficit, and current-account deficit.
5. Green Energy Transition: India recognizes the importance of transitioning to green energy and has set ambitious goals, aiming for net-zero emissions by 2070 and 50% of power generation from non-fossil sources by 2030. The government is actively promoting electric vehicles, green hydrogen, and targeting significant renewable energy capacity by 2030. While the transition presents a substantial investment opportunity, fossil fuels will remain predominant until the shift to green energy is complete.

Conclusion: India’s journey towards becoming the world’s second-largest economy hinges on effectively leveraging its demographic advantages, driving innovation and productivity growth, and increasing labor force participation. Investments in manufacturing, services, and infrastructure, coupled with a focus on sustainable practices and green energy, are critical to India’s economic growth trajectory. By capitalizing on its immense potential and addressing key challenges, India can pave the way for a prosperous future and contribute significantly to global economic development.