2024: India’s Breakout Year

By the end of 2024, the Indian economy will cross an important milestone: a GDP of $4 trillion. India’s GDP is currently $3.70 trillion. Nominal GDP is estimated to grow 11 per cent in calendar 2024 (real 6.5 per cent plus 4.5 per cent inflation deflator) to $4.10 trillion.

That will put India within sight of Germany ($4.2 trillion) and Japan ($4.4 trillion). In 2025, it will pass Germany and in 2026 Japan too, to become the world’s third largest economy

Chris Bradley is a director at McKinsey, Global Institute. He made important points in a recent interview with The Economic Times: “The world in 2050 cannot be prosperous without India participating in it. China will lose 200 million workers to ageing by 2050, but India will gain at least 220 million workers from farm migration. So, there will be a massive shift in the labour pool to the Global South.”

Bradley, however, sounds a word of caution. India’s labour productivity is still not high enough. Upskilling is key to India reaping the full harvest of its demographic dividend which began around 2016 and will last till the mid-2040s. India’s productivity is 40 per cent of China’s and just 12.5 per cent of Japan’s.

The next two decades are therefore crucial. Just as China made full use of its peak demographic dividend between 2000 and 2020 during which its GDP rose 12x from $1.21 trillion to $14.69 trillion, this is India’s opportunity to make the two-decadal big leap forward.

China’s demographic dividend tapered off in the early 2020s. What we are seeing now is a shrinking Chinese population, an ageing workforce and slowing GDP growth rates. The average Chinese is 40 years old and growing older rapidly while the average Indian is still only 28.

India will, however, face similar challenges to China after 2050 when its demographic advantage peters out. India’s urbanisation rate is 30 per cent compared to China’s 65 per cent. The migration of Indian farm labour to urban

centres in the next decade is estimated to increase India’s urbanisation rate to around 50 per cent and boost productivity significantly.

India also needs to enhance its R&D-to-GDP ratio from the current 0.6 per cent to at least two per cent. The average R&D-to-GDP ratio in developed countries is around 2.7 per cent.

With the 2024 Lok Sabha election due in just over three months (the first phase of voting will probably be held, as it was in 2019, in the first week of April), government spending is set to rise in manufacturing and infrastructure. Private capex, slow to get off the blocks, is picking up. Bank credit offtake by the corporate sector has risen as company balance sheets get deleveraged.

*Target: $34 trillion

According to a data-rich study by Hindustan Times, India will be a $34 trillion economy by 2047 if annual GDP growth averages 10 per cent. What if it doesn’t?

If the economy saunters along at six per cent, India in 2047 will be a $17 trillion economy – roughly similar to China’s current GDP.

Both 10 per cent and six per cent scenarios are unlikely. A far more plausible estimate for India’s economy is an average annual GDP growth rate of 7.5-8.0 per cent. Where would that leave the Indian economy in 2047? At around $25 trillion. That’s roughly the current size of the US economy.

Indian exports should bounce back in the final quarter of 2023-24. However, the target of $800 billion in combined merchandise and services exports is unlikely to be met. At best total exports will match last year’s bumper figure of $780 billion. The $1 trillion export target will have to wait till 2026.

The good news though is that the current account deficit (CAD) is shrinking. It was one per cent of GDP in the last quarter and could shrink further. The balance of payments (BoP) in 2023-24, as predicted in this column several months ago, is likely to be in surplus. The reason: services exports are trending at $350 billion a year while net remittances, foreign direct investment (FDI) and foreign portfolio investment (FPI) are wiping out the deficit.

The stock market may be overheated but reflects the optimism of Indian and foreign investors in the India growth story. It’s easy to forget that the Indian economy has endured four years of trauma between 2020 and 2023 with the Covid pandemic, wars in Ukraine and Gaza, maritime trade disruptions and an acute recession in the global economy.

In these challenging circumstances, India is on target to record seven per cent GDP growth in 2023-24, the highest of a major economy.

Analysts expect Indian economic growth to dip in 2024-25 to 6.5 per cent. They were proved wrong in 2023-24. They are likely to be proved wrong again. All kinetic indicators point to the growth momentum continuing in 2024: exports, capex, infrastructure.

An election year brings its own economic momentum. Funds flow into welfare schemes, leading to a spike in consumption. Already, rural consumption – subdued for over a year – has begun to pick up.

If India can make seven per cent annual GDP growth the new normal, the economy will double every 10 years. During its peak 20-year demographic dividend, China grew at nearly 10 per cent a year. If India can take its growth rate to over eight per cent and in the 2030s to nine per cent, the economy will double every eight years.

In 24 years, by 2047, India could therefore rise 8x from $4 trillion to $32 trillion. With population plateauing at 1.5 billion, India’s per capita income in nominal terms would rise to $21,500 and in purchasing power parity (PPP) terms to over twice that.

2024 could be India’s breakout year.