inside-the-rbi-bulletin-6-key-factors-driving-india-s-rise-to-third-largest-economy

India's robust growth trajectory has garnered attention and optimism from financial institutions worldwide, with projections indicating its ascent to become the globe's third-largest economy. The Reserve Bank of India (RBI) bulletin, released on Tuesday, elucidates six pivotal factors expected to propel this economic surge.

 

In terms of purchasing power parity (PPP), India already holds the third spot globally. According to the OECD's December 2023 update, India is projected to surpass the US by 2045 in PPP terms, securing the position of the world's second-largest economy, as noted in the RBI bulletin.

 

As per the RBI bulletin, “tailwinds likely to power India’s take-off," six key factors are as follows:

 

Favourable Demographics

 

India boasts the world's largest and youngest population, with a median age of approximately 28 years. This demographic advantage is expected to last for over three decades, as ageing trends are not anticipated until the mid-2050s. Consequently, India will benefit from a prolonged period of demographic dividends, driven by increasing rates of working-age population and labour force participation, setting it apart from many other countries grappling with ageing populations.

 

Historically Anchored Growth

 

 India's growth has traditionally relied on domestic resources, with foreign savings playing a secondary role. This is evident in the manageable current account deficit (CAD), which stays below a sustainable threshold of approximately 2.5% of GDP. Presently, the CAD hovers around 1%, indicating robust external sector resilience. Notably, external debt remains below 20% of GDP, and net international investment liabilities are under 12%.

 

Fiscal Consolidation

 

Following the COVID-19 pandemic, a methodical approach to fiscal consolidation has resulted in the general government deficit standing at 8.6% of GDP and public debt at 81.6% of GDP by March 2024.

 

 Utilising a dynamic stochastic general equilibrium (DSGE) model, projections suggest that reallocating fiscal expenditure towards sectors generating productive employment, embracing transition, and investing in digitalization could potentially reduce the general government debt to 73.4% of GDP by 2030–31.

 

In contrast, the IMF forecasts indicate a contrasting trend, with the debt-to-GDP ratio expected to climb to 116.3% in 2028 for advanced economies and to 75.4% for emerging and middle-income countries.

 

Sound Financial Sector

 

India's financial sector primarily relies on banks. In the aftermath of the global financial crisis in 2015–2016, the looming issue of asset impairment was tackled through an asset quality review (AQR). Subsequently, a substantial recapitalization effort was initiated between 2017 and 2022.

 

The positive outcomes began to manifest from 2018 onwards, as evidenced by a decline in both gross and net non-performing asset ratios to 3.9% and 1%, respectively, by March 2023. Furthermore, banks now boast significant capital buffers and liquidity coverage ratios well exceeding 100%.

 

The implementation of the Insolvency and Bankruptcy Code (IBC) has facilitated a structured approach to addressing stress in banks' balance sheets. This, coupled with macroeconomic and financial stability, lays a solid foundation for medium-term growth prospects.

 

 Technological Transformation

 

 India is undergoing a transformative phase driven by technology, notably through initiatives like the JAM (Jan Dhan-Aadhaar-Mobile) trinity, which expands formal finance accessibility, boosts tech startups, and facilitates direct benefit transfers. The Unified Payments Interface (UPI) facilitates seamless transactions, further enhancing financial inclusivity.

 

Moderating Inflation

 

 Inflation in India is showing signs of moderation after being impacted by various supply shocks, including those from the pandemic, weather-induced food price spikes, supply chain disruptions, and global commodity price pressures stemming from the Russia-Ukraine conflict.

 

 

These factors collectively position India on a trajectory towards sustained economic growth and global prominence.