A report by Goldman Sachs estimated that the Indian economy will be the world’s second largest economy by 2075, surpassing the United States. Experts drew attention to the need to increase the labor force participation rate for the realization of the prediction.
Goldman Sachs announced that India is on its way to become the world’s second largest economy by 2075, surpassing not only Japan and Germany, but also the United States.
As of today, India is the fifth largest economy in the world after Germany, Japan, China and the USA.
In a recent report, the investment bank said the country’s advancement in innovation and technology, along with a growing population, were influential factors in its forecasts of higher capital investment and increased worker productivity.
“In the next two decades, India’s dependency ratio will be one of the lowest among regional economies,” said Santanu Sengupta, Goldman Sachs Research India Economist.
A country’s dependency ratio is measured by the number of dependents (under 14 and over 65) and the total population of working age (ages 15-64). A low dependency rate indicates more adults of working age who can proportionally support the young and old.
The key is to increase the labor force participation rate.
Sengupta added that the key to unlocking the potential of India’s rapidly growing population is to increase its workforce participation. “So this is really a window for India to get it right in terms of building production capacity, continuing to grow services and sustain growth of infrastructure,” the economist said, predicting that India will have one of the lowest dependency rates among major economies over the next 20 years.
The Indian government prioritizes infrastructure building, especially in the establishment of highways and railways. The country’s latest budget aims to continue 50-year interest-free loan programs to state governments to encourage infrastructure investment.
Goldman Sachs believes this is a good time for the private sector to scale up to build capacity in manufacturing and services to create more jobs and employ a large workforce.
Technological progress and innovation are critical
The investment bank said that the country’s technological progress and innovation are the leading factors that will lead India’s economic trajectory.
India’s tech industry revenue is expected to grow by $245 billion by the end of 2023, according to Nasscom, India’s non-governmental trade association. According to Nasscom’s report, this growth will come from information technology, business process management and software product streams.
On the other hand, Goldman predicted that capital investment will be another key driver of India’s growth.
“India’s savings rate will increase with falling dependency rates, rising incomes and deeper financial sector development, which will likely make the pool of capital available to drive more investment,” Goldman’s report said.
Female labor force participation rate is significantly low
The weak point of the bank’s forecast is the labor force participation rate and whether it will increase at the rate Goldman predicts.
Pointing out that “the labor force participation rate in India has decreased in the last 15 years”, the report underlined that women’s labor force participation rate is “significantly lower” compared to men.
“Only 20 percent of all women of working age in India are employed,” the investment bank wrote in a separate report in June, suggesting that the low figure may be due to women’s employment in piecework, which is not taken into account in the measurement of formal employment, which is mainly based on job delivery.
Goldman said that net exports also hindered India’s growth due to India’s current account deficit. However, the bank underlined that services exports soften the current account balances.
According to Goldman’s report, India’s economy is driven by domestic demand, as opposed to the more export-dependent economy in the region, and up to 60 percent of its growth is attributed mainly to domestic consumption and investment.
S&P Global and Morgan Stanley also predicted that India is on track to become the third largest economy by 2030.
India’s first-quarter GDP rose 6.1 percent year-on-year, easily exceeding Reuters’ growth expectations of 5 percent. The country’s full-year growth is projected to be 7.2 percent, compared to 9.1 percent growth in the 2021-2022 fiscal year.