India says it will become the world's third largest economy by 2027, can it be achieved?

India's Ministry of Finance recently said that by 2027, India will become the world's third largest economy after the United States and China.

In recent years, India's economy has grown rapidly and is expected to become the fastest-growing major economy. India's finance ministry also said that economic growth is expected to reach or exceed 7% in the 2023-2024 fiscal year, which would be the third consecutive year of 7% growth in India.

Sevin Yeltekin, dean of the Simon School of Business at the University of Rochester and a macroeconomist, told the CBN reporter that India's economy has its own characteristics, starting with the service industry, rather than the manufacturing industry that is common in other countries. Rapid growth may be easy for an emerging economy like India, but sustaining sustainable, healthy growth is the real challenge.

India's economy is accelerating

India's Ministry of Finance's forecasts are more optimistic than previous forecasts from international institutions. Bank of Asia forecasts India's economy to grow by 6.7% in fiscal year 2024 (April 1, 2023 ~ March 31, 2024), compared to 6.3% for both the International Monetary Fund (IMF) and the World Bank.

In a report titled "The Indian Economy - A Review" (the "Report"), V Anantha Nageswaran, the chief economic adviser to the Indian government, explained the drivers of India's economic growth, saying that the reforms promoted by the government over the past decade have driven strong growth in private consumption and investment.

He also said India's investment in physical and digital infrastructure has boosted supply chains and manufacturing. As a result, gross domestic product (GDP) growth in fiscal year 2024-2025 is likely to be close to 7%.

For an economy with a large population like India, the development of infrastructure construction and related supporting mechanisms is the only way to go. Roads, bridges and airports under construction can be found almost everywhere in India today. Some media commented that Mumbai, known as India's financial capital, has turned into a huge construction site.

In August 2021, when India was still plagued by repeated epidemics, Prime Minister Narendra Modi said that India would launch an infrastructure plan with a scale of 100 trillion rupees (about 8.61 trillion yuan).

The World Bank has previously praised this approach, saying that during the pandemic, when the country's private sector needed bailouts, India increased infrastructure spending and made overall improvements to poor roads, ports and power facilities that once hindered business investment.

In March 2023, Modi also said that infrastructure development is the driving force of India's economy and that "there is a need for faster and faster pace to achieve the goal of making India a developed country by 2047." In the aforementioned report, Nagswaran also repeated the above claims, saying that the Indian government aims to become a developed country by 2047.

Despite the current rapid economic development of India, most economists say that this target is exaggerated, and they have calculated that the average annual growth of the Indian economy in the next 20 years or so will reach about 9%-10% to reach the per capita GDP mark of 20,000 US dollars, which is generally considered to be the standard of developed countries.

Yeltkin told the CBN reporter that if an economy wants to maintain sustainable and good growth, it needs to meet many conditions at the same time. Just like the development of a business, it requires infrastructure, opportunities in the international market, capital injection, advanced technology and a stable regulatory environment, etc., and the development of a country is even more so, like a jigsaw puzzle that puts together all the necessary pieces to achieve fast and sound economic development.

India's general election is expected to be held between April and May this year, and the vision of 2047 seems too far away, so on January 3, India's Minister of Commerce and Industry Piyush Goyal said that before the election, India will become an economy with 4 trillion US dollars, "in 2~2.5 years, India will become a 5 trillion US dollar economy".

Nagaswaran also said in the report that by 2027, India's GDP is expected to reach $5 trillion, surpassing Germany and Japan to become the world's third-largest economy.

While the pre-election remarks are inevitably suspicious of building momentum for the election, they are not unfounded, with India's gross domestic product (GDP) forecast to reach $4.95 trillion in 2026, according to the IMF's World Economic Outlook released in October 2023.

Goldman Sachs predicted in a report in July last year that India is expected to surpass the United States to become the world's second largest economy after China by 2075 based on the demographic dividend and progress in innovation and technology.

Pull manufacturing

On January 30, the Indian government announced that it would reduce tariffs on plastic and metal parts of mobile phones, SIM card slots and other parts from 15% to 10%. In the past, India often increased tariffs frequently for reasons such as trade protectionism, and it was rare to take the initiative to reduce tariffs.

It is clear that the Indian government has other intentions. Pankaj Mohindroo, President of the Indian Mobile Phone and Electronics Association (ICEA), said, "This is an important and welcome policy measure taken by the government to improve the competitiveness of India's mobile phone manufacturing industry. Scaling up and taking advantage of low import tariffs is key to transforming India into a global electronics manufacturing and export hub. ”

The mobile phone manufacturing industry is currently a key manufacturing industry supported by the Indian government. In March 2020, India launched the "Production Linked Incentive Scheme" (PLI) to select key industries to focus on development. The Indian government provides high subsidies to companies participating in the PLI to increase domestic production in strategic sectors where India has a comparative advantage, including the formation of resilient supply chains, enhanced manufacturing competitiveness, and increased exports.

The first phase of PLI focuses on mobile phone manufacturing, electronic components and manufacturing. Mobile phone manufacturing is undoubtedly one of the fastest-growing sectors of India's manufacturing industry in recent years. India's Dixon Technologies, located on the outskirts of India's capital, New Delhi, is a microcosm of the rapid growth of mobile phone manufacturing.

In 2021, Dixon's manufacturing capacity could only assemble mobile phones for Motorola, and now it produces 500,000~600,000 smartphones per month, and the company said that it will further increase its production capacity to 850,000 units from 2024.

However, while India's electronics exports have grown at a significant pace, the growth in the overall size of its manufacturing sector has been limited. According to the Reserve Bank of India, India's manufacturing sector accounted for about 17.7% of GDP in FY 2022-2023, down from 18.7% in FY 2021-2022 and 18.3% in FY 2020-2021. Modi has proposed to increase India's manufacturing share of GDP from 15% to 25% by 2020 and create 100 million new manufacturing jobs, a target that has now been postponed twice to 2025.

The development of the manufacturing industry is an important starting point for India to solve the employment problem for its huge population. India's unemployment rate hit its highest level in more than two years late last year, according to the Centre for Monitoring India's Economy (CMIE), which is not good news for Modi, who is about to start his general election.

In its Global Credit Outlook 2024 released in December, rating agency S&P Global said India will remain the world's fastest-growing major economy for at least the next three years, but the report said that "whether India can become the next global manufacturing hub will be a major test, and this is a huge opportunity".