A leading global investment bank says India could overtake the UK, Italy and France and have the world's fifth largest economy within a decade.
The report by Goldman Sachs says if trends continue; India's economy could also surpass the United States before 2050 and be second only to China's.
It says a decade of reforms in India has brought increased competition and efficiency; but poor infrastructure is already struggling to keep up with growth and might hold the country back.
The report says there is not enough electricity to meet demand; ports are overflowing; and many roads are in poor condition.
Goldman Sachs also says a shortage of skilled workers may undermine the future expansion of India's IT industry.
Goldman says that India's high growth rate since 2003 represents a structural increase (rather than simply a cyclical upturn), and projected India's "potential or sustainable growth rate" at about 8 per cent until 2020.
In a 2003 report on the so-called Brics economies of Brazil, Russia, India and China, the bank had forecast a 5% long-term Indian growth rate.
“There has been a structural increase in India’s potential growth rate since 2003 on the back of high productivity growth,” the report said. “India’s contribution to world growth will be greater (and faster) than implied in our previous Brics research.”
Goldman now forecasts that India’s economy, measured in absolute dollar terms, will overtake those of Italy, France and the UK by 2017. It will overtake Germany’s in 12 years, Japan’s in 18 and the US in 2042 to become the largest economy in the world after China by 2042.
"The recent growth spurt was achieved primarily through a surge in productivity, which we believe can be sustained. India is well-positioned to reap the benefits of favourable demographics, including an `urbanisation bonus', and a further rise in capital accumulation, in part from an upsurge in foreign direct investment," the report says.
The risk to the country's growth stems from political issues (including a rise in protectionism), supply-side constraints (including business climate, education and labour market reforms), and environmental degradation.
Productivity growth, which is driving the increase, is expected to continue over the medium term. A turnaround in manufacturing productivity has been central to the productivity growth, it is claimed.
The private sector was the principal driver of this turnaround as it improved efficiency in the face of increased competition. The underlying reasons are: increased openness to trade, investment in information and communication technology, and greater financial deepening. These factors still have some distance to run, Goldman Sachs says.
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