India to overtake UK as 5th largest economy this year, emerge second in Asia-Pacific by 2025

04 Jun 2019

India, with a total gross domestic product (GDP) of over $3 trillion, is forecast to overtake the UK to become the world's fifth largest economy this year and is projected to surpass Japan to become the second largest in the Asia-Pacific region by 2025, IHS Markit said on Monday.

In a report on the coming back to power of Prime Minister Narendra Modi and his BJP party in the national elections, it said the economic outlook “looks positive” for the second term of Modi government, with GDP growth forecast to average around 7 per cent per year over the 2019-2023 period.

“India is forecast to become the world’s fifth largest economy in 2019, reaching a total GDP size exceeding $3 trillion, and overtaking its former colonial ruler, the United Kingdom. By 2025, Indian GDP is also forecast to surpass Japan, which will make India the second-largest economy in the Asia-Pacific region,” it said.

With rising GDP, India will continue to contribute to the global growth momentum and play an increasingly important role as one of the Asia-Pacific region’s major economic growth engines, helping to drive Asian regional trade and investment flows.

In Modi’s second term of office, India will continue to confront significant economic challenges. “A key policy priority for the Indian government will be to continue to drive reforms in the public sector banks and reduce the burden of non-performing (or bad) loans on their balance sheets,” IHS said.

While manufacturing sector’s share in the GDP is still at 18 per cent against the target of 25 per cent, around 7.5 million persons are projected to join the Indian workforce per year on average over the next two decades.

This, IHS said, will create strong pressure on the Modi government to generate sustained rapid employment growth in both the manufacturing and services sectors in order to prevent rising unemployment and underemployment in the Indian labour force.

“Moreover, the increase in India’s total population between 2015 and 2050 (by around 265 million) is projected at around 350 million persons, creating significant fiscal challenges for the government in order to deliver adequate physical infrastructure such as electricity, sanitation, affordable housing, and public transport,” it said.

Continuing to drive the transformation of India’s industrial sector through ‘Make in India’ strategy will also be a strategic priority, in order to improve manufacturing sector output growth and generate stronger employment growth, it said. “When PM Modi launched the Make in India strategy in 2014, he set a target of increasing the contribution of manufacturing to GDP to 25 per cent. However, by 2018, the manufacturing sector share of GDP is still at 18 per cent, which still leaves a substantial gap to bridge in order to achieve this vision.”

Despite significant achievements in infrastructure development during Modi’s first term, rapid infrastructure development in key sectors such as transport and power infrastructure remain important priorities, as well as reducing the regulatory burden of government red tape.

India was ranked 77 out of 190 countries that are included on the World Bank’s Ease of Doing Business Index for 2019.

“However, although India still lags behind other large emerging markets such as Turkey (43rd), China (46th) and Mexico (54th) on this ranking, India has made remarkable progress in improving its ranking compared with its ranking at 142nd out of 189 countries in the Ease of Doing Business ranking for 2015, which reflected a survey undertaken during the last year of the UPA Congress-led coalition government.

“This reflects the considerable efforts made during PM Modi’s first term of office to try to reduce the regulatory burden of the Indian national and state bureaucracies on Indian businesses,” IHS said.

IHS said the extent of BJP’s electoral victory was “well beyond market expectations”.

“The resounding victory in the Indian national elections of the BJP Party led by Prime Minister Modi, with another large parliamentary majority, will provide continuity of economic policy for India over the next five years. The large parliamentary majority secured by the BJP has avoided the key risk of a weak and fragmented coalition government governing the nation, which could have undermined momentum for further economic reforms,” said IHS Markit’s Asia-Pacific Chief Economist Rajiv Biswas.

Stating that Modi and the BJP have achieved steady and robust macroeconomic growth over the past five years, it said the election results signal a strong vote of confidence from the electorate in the party’s economic track record in governing the nation.

Since Prime Minister Modi took office in 2014, Indian GDP has increased by 50 per cent, from $2 trillion in 2014 to an estimated $3 trillion in 2019, a total net increase of $1 trillion in GDP in just five years.

“The BJP government benefited from the slump in world oil prices during 2014-16, which helped to significantly reduce inflation pressures in India. Falling oil prices also substantially reduced India’s oil import bill, which helped to lower the current account deficit as share of GDP significantly,” it said.

A major economic policy reform achieved under Modi’s first term of office was the implementation of the Goods and Services Tax (GST) in 2017 to create a unified single indirect taxation system in India, removing the complex previous system of different state-based indirect taxes which had created significant inefficiencies, such as higher logistics costs, for firms distributing products across state boundaries.

The GST will help to reduce logistics costs as well as improving industrial competitiveness for industries.

“Nevertheless, India has also faced its fair share of economic challenges during PM Modi’s first term of office, including bad debt problems of the public sector banks as well as economic turbulence during the demonetization episode in 2016,” it said adding overall the BJP has provided a steady hand at the helm of government, delivering five consecutive years of economic stability, with strong growth and moderate inflation.