For a third term under the leadership of Prime Minister Narendra Modi, India continues to both enjoy high economic growth rates (+6.4% in 2024 and +6.5% in 2025, following +7.7% in 2023) and maintain a brisk pace of reforms. A strong demographic forecast for the coming decades (a working-age population exceeding 1 billion by 2075), investments in logistics accessibility, and attracting record foreign investments into an already impressive production potential all present a markedly encouraging landscape for Polish firms.
What should be paid attention to? It’s worth introducing a framework (and conditions) to Polish-Indian cooperation similar to other bilateral agreements negotiated by India. Polish entrepreneurs may invest, particularly in the export/local production of consumables, but must do so with awareness – remembering the regulatory weaknesses and insecurities of the Indian banking sector.
Here’s a summary of points to note:
- By 2030, India will become the second-largest economy in the Asia-Pacific region and the third-largest economy globally.
- Stability and continuity are crucial – Narendra Modi is now into his third term as prime minister in the world’s largest democracy (with about 970 million eligible voters, representing over 10% of the global population). This ensures a continuity of reforms, which will focus on regulations, infrastructure, labor markets, and the manufacturing sector to sustain fast growth rates and position India as a prime destination for foreign investments.
- India is steadily investing in infrastructure and trade logistics – advancing from 44th to 38th in the global logistics accessibility ranking and showing ambition to be among the top 25 most accessible countries in terms of logistics.
- India champions foreign investments – expanding the manufacturing base in vital sectors like electronics, EVs, IT, renewable energy, and pharmaceuticals. This not only boosts overall employment but also stabilizes the middle class.
- India’s demographics support the nation’s long-term economic prospects – the working-age population (aged 15-64) is expected to exceed 1 billion by 2026 and maintain this level until 2075.
- India is leveraging opportunities in the ongoing diversification of the global supply chain by swiftly opening up its economy, lifting high barriers (so far, twice as high tariffs compared to other emerging economies in the region), mostly in the form of bilateral agreements.
- Threats? Despite stability improvements, the banking system still has numerous weaknesses – a sharp increase in credits (especially unsecured) combined with inadequate regulatory oversight means that tight financial flow monitoring is still essential. The Indian capital market and exchange rates also need structural reforms.
According to forecasts, by 2030, India will become the second-largest economy in the Asia-Pacific region and the world’s third-largest. Allianz Trade expects India’s annual economic growth to average about +6.6% from 2026-2030. India has demonstrated the resilience of its economy both domestically and globally, even in the face of socio-economic adversities of recent years. India’s growth is multi-faceted, with favorable demographic conditions and the status of the country as a manufacturing power being key. India’s economic growth is supported not only by strong macroeconomic fundamentals and a improving business environment but also robust investments and consumer spending. India’s growing global significance is endorsed by significant events such as the G20 presidency, successful lunar missions, and Prime Minister Modi’s state visit to the US. These events help India become a distinct and influential voice bridging Western nations with the global South.
With a growing population, improving living standards, and a burgeoning middle class, demographics could play a significant role in continuing India’s economic growth. Additionally, employment indicators are rising with the advent of startups and fintech firms across the country. This means greater purchasing power for consumers and increases in consumption.
Furthermore, India is one of the world’s largest producers of a broad range of goods, from pharmaceuticals and electronics to textiles and automobiles – worth noting that currently only 3% of consumer goods in India are imported. With the said increase in employment and growth of the middle class, demand for consumer goods is rising, while existing foreign investments are reinforcing India’s export potential.
The execution of continued reforms amid rapid growth will ensure that India remains appealing to foreign investors. The latest data highlights India’s leading position among emerging economies in terms of greenfield investment projects, with 1,008 projects announced in 2022 valued at $78 billion – equating to 2.3% of India’s GDP (refer chart 1). Although India’s overall restrictiveness of foreign direct investment (FDI) regulations is similar to many other Asia-Pacific nations, there is room to improve the finer details and quality of regulations that lag behind major ASEAN economies. Enhancing transparency of market regulations and predictability in enforcing laws, like tax inspections, and fines, could further boost investor confidence. In the insurance sector, the “Insurance for all by 2047” policy, launched in 2022, aims to provide each citizen with adequate insurance protection, support every firm with appropriate insurance solutions, and make India’s insurance sector globally attractive. Additionally, the Indian government plans to focus on improving the functioning of the still underdeveloped capital market in the country, where foreign investors still play a minor role. Critical areas of the economy requiring further reforms include increasing market liquidity, especially in the bond market, improving currency convertibility, simplifying complex regulations (including tax and cross-border investment rules) and preventing disorderly growth of markets that could lead to financial (and real-estate) bubbles or undermine foreign investor confidence.
The Indian government’s goal is to elevate the level of India’s infrastructure and trade logistics so that by 2030, India ranks among the top 25 countries in the world in this regard. According to the World Bank’s Logistics Performance Index, India improved from 54th in 2014 to 44th in 2018 and to 38th in 2023. This progress can largely be attributed to key initiatives like the Bharatmala project, which focuses on the development of national highways and expressways, and the Sagarmala project aimed at building port infrastructure. Both projects were launched in 2015. Despite these improvements, India’s logistics and transportation infrastructure still lags behind many regional competitors.
Several other major infrastructure projects are set to be launched in the near future, including the Delhi-Mumbai and Bengaluru-Chennai expressways, the Navi Mumbai and Noida airports, and the Mumbai coastal road project. Additionally, the National Logistics Policy, announced in 2022, aims to support India’s logistics efficiency through the development of digital systems. Efficient national transport networks and port logistics would enhance India’s productivity and make the country even more attractive to foreign investors.
India benefits from a dynamic and growing workforce, with prospects for further increasing this potential.
Demographics support India’s long-term economic prospects, with the working-age population (aged 15-64) expected to exceed 1 billion by 2026 and maintain that level until 2075, peaking at 1.1 billion in 2048. However, India’s demographic dividend faces several challenges. These include high youth unemployment (around 23% in 2022), a low female labor force participation rate (30% in 2022, the lowest among major Asian economies), and education levels, with only 50% of the population aged 25 and over having completed secondary education in 2022. Labor market reforms are often controversial, but a government with a strong majority could implement significant measures to unlock the potential of the workforce. These could include reducing bureaucracy, easing restrictions on overtime, encouraging greater female workforce participation, and reducing the share of informal jobs. The latter is particularly important in the agricultural sector, and supporting the manufacturing sector could significantly increase the share of formal employment.
Strengthening the manufacturing sector: leveraging opportunities offered by global supply chain diversification. The Indian government aims to increase the share of manufacturing in the economy to 25% by 2025, up from 13% in 2022. This would bring India closer to regional competitors such as China (28%), Vietnam (25%), and Indonesia (18%). Key manufacturing sectors include electronics, electric vehicles, information technology, renewable energy, and pharmaceuticals. Although the 2025 target is likely too ambitious, it serves as a catalyst for increased policy support. Achieving this goal requires essential changes at the national level, such as investments in infrastructure, labor market reforms, and workforce upskilling. Additionally, trade policy is a critical area of government action. India remains one of the most protectionist emerging economies, with average import tariffs more than twice as high as in other countries. Efforts to address this have been evident in recent years, with India actively negotiating bilateral free trade agreements outside its traditional Asian partners. Since 2021, India has signed more free trade agreements than its peers in ASEAN and Mexico, signaling a desire to capitalize on geopolitical shifts as international companies seek alternatives to China.
We expect the Indian economy to grow by +6.4% in 2024 and +6.5% in 2025, following +7.7% in 2023 (calendar years). These forecasts position India as the fastest-growing major economy in the world. This growth is driven by strong household consumption, investments supported by government spending, and improved confidence as interest rates rise. We predict that the Reserve Bank of India (RBI) will start lowering its interest rate in the second half of 2024 (following hikes totaling +250 bps from May 2022 to February 2023) as inflation returns to the RBI’s target (we forecast 4.6% in 2024 and 2025, after 5.7% in 2023). India’s dynamic growth is particularly noteworthy in the context of renewed concerns about the Chinese economy since 2023, positioning India as the next bright spot among emerging markets. As a result, Indian capital markets have performed well and may be poised for further gains. The inclusion of Indian government bonds in global indices in 2024 should attract further inflows and support the currency. While short-term currency performance may be influenced by external factors such as expectations for US monetary policy, further mild depreciation is likely in the medium term due to persistent current account deficits.
Risks – What Could Go Wrong in Economic Cooperation with India?
Although there are many reasons for optimism about India’s economy in the short- and long-term, it is important to remain vigilant about key risks that could threaten its growth trajectory.
The return of a trade war. In the short term, an external factor is the potential risk of a trade war resuming under another Trump administration. In a scenario where the US raises tariffs on non-critical goods dependent on China to 60% and 10% on the rest of the world, and trading partners retaliate in kind, economies worldwide would suffer. Our estimates indicate a potential impact of such a scenario on India’s economic growth of -0.2pp in the second year and -0.3pp in the third year of such a trade conflict.
Weaknesses in the banking sector. Despite improvements in the banking sector, as evidenced by a decline in the non-performing loan ratio (from 6.9% in Q3 2021 to 3.2% at the end of Q3 2023) and ongoing reforms, the banking sector has areas that require careful monitoring. A sharp increase in loans (especially unsecured loans) coupled with inadequate regulatory oversight means that continued close monitoring of financial flows is necessary.
Reform momentum. Maintaining the pace of reforms is crucial for unlocking India’s growth potential and sustaining investor confidence, as described earlier in this note.
Impact of climate change. Climate change poses a significant risk to the Indian subcontinent, potentially limiting economic growth through reduced labor productivity and increased inflation (particularly in food prices). By 2050, the decline in labor productivity due to climate change could reduce India’s GDP by an average of -7%. It is estimated that to limit global temperature rise to 1.5°C, India will need to invest $143 billion by 2030.
Source: https://ceo.com.pl/indie-wschodzaca-gwiazda-swiatowej-gospodarki-94723
