India will emerge as the world's third largest economy, surpassing Japan by 2028, on the back of rising savings rates, financial maturity and increasing incomes, Bank of America Merrill Lynch said.
"We believe India stands out among the large emerging economies as having the best prospects for strong growth over the next decade. In 2028, we estimate it will surpass Japan in nominal GDP terms to emerge as the world's third-largest economy," said Indranil Sen Gupta, economist at BofA Merrill Lynch.
Although India's GDP size was just $2.3 trillion, a fraction of China's $11.4 trillion and $18.6 trillion of the US, in 2016, the country could already outpace Japan as the third largest in purchasing power parity (PPP) terms at $8.7 trillion.
Global management consultant PricewaterhouseCoopers has forecast that India would outpace the US to emerge as the second largest economy in PPP terms by 2040 to $30 trillion from $8.7 trillion in 2016, while the US will grow from $18.6 trillion to $28.3 trillion.
Analysts at Geojit Financial Services said Moody's upgrade of India's credit rating to Baa2, coming as it does after the World Bank's sharp upgrade of India's status in doing business ranking from 130 to 100 and the IMF chief Christian Lagarde's remark that the Indian economy is on solid track, is a vote of confidence in India's economic reforms from three of the world's leading financial institutions.
India's GDP growth is estimated to have slowed to 7.1 per cent in 2016-17 from 7.9 per cent in 2015-16 after the government decision to scrap high denomination notes or 86 per cent of currencies in circulation. However, analysts expect the economy to bounce back from 2017-18 on rising consumer demand.
Railways and Coal Minister Piyush Goyal said India would certainly grow at eight per cent next year, and at a faster rate in the years ahead as more of the economy gets more formalised and benefits of the reforms start pouring in. India's growth will be driven by three powerful factors, said Gupta in the Global Economic Weekly report.
'First, falling dependency ratios should raise savings and investment rates. Second, financial maturity, due to financial liberalisation and inclusion, should continue to lower lending rates structurally. Finally, increasing incomes and affordability will power the emergence of mass-markets, supporting an expected seven per cent real GDP growth," Gupta said.
"Financial maturity likely will be the dominant macro story of the Indian equity market, in our view," said BofA Merrill Lynch economist Aashta Gudw.
India's credit-to-GDP ratio, a proxy for financial maturity, will likely climb to 83 per cent of GDP from 44 per cent now. The scope for penetration remains substantial with India's credit-to-GDP ratio at 51.3 per cent still trailing that of other Bric nations averaging 91 per cent. Better financial allocation of rising financial savings should be driven by three factors including financial extension and inclusion, emergence of financial products and financial market development.
"This should be driven by the demographic dividend raising savings/investment rates, on the one hand, and financial liberalisation and inclusion, on the other," said Gudw.
In addition, the bond market should see a steady opening up of the corporate bonds to foreign portfolio investors (FPIs) to develop a market for project finance.
"FPI investment limits in the corporate bond market have already climbed to $69 billion from $16 billion in 2011. Finally, we continue to expect the RBI to build up forex reserves, in the forex market, to insulate the economy from contagion," said the economists.
The bank expects India's growth to be driven by services. "Every emerging market grows in response to the drivers of its time. Services have climbed by 10 per cent to almost 70 per cent of the world GDP over the past 20 years. Not surprisingly, they have also emerged as a key driver of India's growth as well."