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India is likely to emerge as the world’s third-largest economy in 2031 (fiscal 2031-32), suggests a recent report by Bank Of  America (BofA) Securities, and should touch Japan’s nominal GDP (in USD) that year, reports Business Standard. This growth will be registered despite the impact of the Covid-19 pandemic..

The projections have assumed 6% real growth rate, 5% inflation and 2% depreciation. Currently, India is the world’s sixth-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP).

In 2017, BofA Securities had expected the Indian Economy to achieve this feat by 2028, which has been pushed back now by three years due to the Covid-19 pandemic. The earlier forecast, according to BofA Securities, was based on three drivers – a coming demographic dividend; growing financial maturity; and the emergence of mass markets. These factors, it said, are still going strong.

Forex buffer

Besides, BofA Securities has identified two additional drivers – forex reserves buffer and softer real lending rates – that can help the country become the world’s third-largest over the years.

IBofA Securities India Economist Indranil Sen Gupta in a co-authored note with Aastha Gudwani states said IBofA Securities has conservatively taken a lower 9% growth and pushed back by three years to 2031/FY32.

“Our projection of 6% real growth is actually below the 6.5% average since 2014 and our estimated 7% potential. 5% inflation (from 6% earlier) corroborates to recent threshold inflation estimates. Finally, we have reduced average annual depreciation to 2% from 3% with the Reserve Bank of India (RBI) re-achieving adequacy of FX reserves,” wrote Indranil Sen Gupta.

Key concerns

Rising oil prices that can stoke inflation are a cause for concern, BofA said, and pose a risk to the projections.

“Sustained $100+/barrel (bbl.) oil would push the current account deficit beyond the sustainable 2% of GDP level and pose a downside risk. Estimate FY22 current account deficit at 0.8% of GDP at $60/bbl. Every $10/bbl. increase the current account deficit by $9 billion/0.3% of GDP,” Indranil Sen Gupta and Aastha Gudwani wrote.

Besides rising commodity prices, especially crude oil, rising Covid-19 cases across the country, analysts say, are another risk that can dent the fragile economic recovery in the short-to-medium term. The impact, however, will be less severe as compared to one on account of the full-scale lockdown in 2020.

“The resurgence of pandemic cases in the state of Maharashtra is a matter of concern, but it is too early to consider it a pan-national second wave. We do not yet see this as a threat to our medium-term outlook, as virus resurgences in other countries have proven less economically disruptive than originally feared,” wrote Sonal Varma, managing director and chief India economist at Nomura, in a recent co-authored note with Aurodeep Nandi.

Tailwinds to growth remain intact from the lagged impact of easy financial conditions, fiscal activism, strong global growth and the ‘vaccine pivot’ point, Nomura said.

(The story is based on Businesstandard report)

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