RBI lists 6 factors that helped India become the world's third largest economy

Ronit Kawale
Ronit Kawale - Senior Editor
4 Min Read

While India's recent growth performance has surprised many, prompting a flurry of upgrades from financial institutions like the IMF, an RBI bulletin released on Tuesday cited six factors that could propel the country from becoming the world's third largest economy. Will inspire you to become.

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In purchasing power parity (PPP) terms, the Indian economy is already the third largest in the world. The RBI bulletin states that as per OECD's December 2023 update, India will overtake the US in terms of PPP by 2045 and become the world's second largest economy.

According to the bulletin, the “tailwinds affecting India's take-off” are as follows:

* Demography favors a rising development profile. Currently India has the largest and youngest population in the world. The average age is around 28 years; Aging will not occur until the mid-2050s. Thus, India will enjoy a demographic dividend window for more than three decades, driven by growth in the working-age population rate and labor force participation rate. This is in stark contrast to the world grappling with the challenge of aging broadly.

* India's growth performance has historically been based on domestic resources, with foreign savings playing a small and complementary role. This is also reflected in the current account deficit (CAD), which remains within a sustainable range of around 2.5 per cent of GDP. Currently, the CAD averages around 1 percent, and is linked to various indicators of external sector resilience – for example, external debt is below 20 percent of GDP and net international investment liabilities are below 12 percent. .

*The gradual path of fiscal consolidation adopted after the Covid pandemic has targeted the general government deficit to 8.6 per cent of GDP and public debt to 81.6 per cent of GDP by March 2024. Employing a dynamic stochastic general equilibrium (DSGE) model, it is estimated that reprioritizing fiscal spending by targeting productive employment generating sectors, embracing transition and investing in digitalization will reduce general government GDP by 2030–31. Debt could decline to 73.4 percent of GDP.

In contrast, the debt-to-GDP ratio is projected by the IMF to rise to 116.3 percent in 2028 for advanced economies and 75.4 percent for emerging and middle-income countries.

* India's financial sector is mainly bank based. In 2015–2016, the problem of asset impairment in the wake of the global financial crisis was addressed through Asset Quality Review (AQR). A large-scale recapitalization was carried out during 2017-2022. The beneficial impact started appearing from 2018 – gross and net non-performing assets ratios declined to 3.9 per cent and 1 per cent respectively by March 2023, with large capital buffers and liquidity coverage ratios above 100 per cent.

The Insolvency and Bankruptcy Code (IBC) has created the institutional environment to address stress in banks' balance sheets. Macroeconomic and financial stability is providing the basis for medium-term growth prospects.

* India is going through a transformational change driven by technology. JAM's trinity – Jan Dhan (basic no-frills accounts); Aadhaar (universal unique identity); and mobile phone connections – expanding the reach of formal finance, fostering tech startups, and enabling direct benefit transfers. India's Unified Payments Interface (UPI), an open-ended system that powers multiple bank accounts in a single mobile application of any participating bank, enabling inter-bank, peer-to-peer and person-to-merchant transactions. Promoting uninterrupted.

* Inflation in India is easing after a surge in multiple and overlapping supply shocks due to the pandemic, weather-induced food price spikes, supply chain disruptions and global commodity price pressures following the Russia-Ukraine conflict.

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