Morgan Stanley
  • Research
  • Nov 8, 2022

India’s Impending Economic Boom

India is on track to become the world’s third largest economy by 2027, surpassing Japan and Germany, and have the third largest stock market by 2030, thanks to global trends and key investments the country has made in technology and energy.

India is already the fastest-growing economy in the world, having clocked 5.5% average gross domestic product growth over the past decade. Now, three megatrends—global offshoring, digitalization and energy transition—are setting the scene for unprecedented economic growth in the country of more than 1 billion people.

“We believe India is set to surpass Japan and Germany to become the world’s third-largest economy by 2027 and will have the third-largest stock market by the end of this decade,” says Ridham Desai, Morgan Stanley’s Chief Equity Strategist for India. “Consequently, India is gaining power in the world order, and in our opinion these idiosyncratic changes imply a once-in-a-generation shift and an opportunity for investors and companies.”

All told, India’s GDP could more than double from $3.5 trillion today to surpass $7.5 trillion by 2031. Its share of global exports could also double over that period, while the Bombay Stock Exchange could deliver 11% annual growth, reaching a market capitalization of $10 trillion in the coming decade.

In a new Morgan Stanley Research Bluepaper, analysts working across sectors look at how this new era of economic development could bring about staggering changes: boosting India’s share of global manufacturing, expanding credit availability, creating new businesses, improving quality of life and spurring a boom in consumer spending.

“In a world that is currently starved of growth, the opportunity set in India must be on global investors’ radar,” says Chetan Ahya, Morgan Stanley’s Chief Asia Economist. “India will be one of only three economies in the world that can generate more than $400 billion annual economic output growth from 2023 onward, and this will rise to more than $500 billion after 2028.”


Global Offshoring Creates a Workforce for the World

Companies around the world have been outsourcing services such as software development, customer service and business process outsourcing to India since the early days of the Internet. Now, however, tighter global labor markets and the emergence of distributed work models are bringing new momentum to the idea of India as the back office to the world.

“In a post-Covid environment, CEOs are more comfortable with both work from home and work from India,” says Desai. In the coming decade, he notes, the number of people employed in India for jobs outside the country is likely to at least double, reaching more than 11 million, as global spending on outsourcing swells from $180 billion per year to around $500 billion by 2030.

India is also poised to become the factory to the world, as corporate tax cuts, investment incentives and infrastructure spending help drive capital investments in manufacturing.

“Multinationals are now buoyant about the prospects of investing in India, and the government is helping their cause by investing in infrastructure as well as supplying land for building factories,” says Upasana Chachra, Chief India Economist. Morgan Stanley data shows that multinational corporations’ sentiment on the investment outlook in India is at an all-time high. Manufacturing’s share of GDP in India could increase from 15.6% currently to 21% by 2031—and, in the process, double India’s export market share. 

India's Share of Manufacturing is expected to increase to 21% of GDP by 2031

Source: CEIC, Morgan Stanley Research estimates

Digitalization, Credit and the Consumer

India began laying the foundation for a more digital economy more than a decade ago with the launch of a national identification program called Aadhaar. The system creates biometric IDs to establish proof of residence and has been instrumental in digitizing financial transactions, among other benefits.

This initiative is now part of IndiaStack, a decentralized public utility offering a low-cost comprehensive digital identity, payment and data-management system. “IndiaStack is likely to lead to a massive change in how India spends, borrows and accesses healthcare,” says Desai.

IndiaStack has broad applications, including a network for lowering credit costs, making loans more accessible and affordable for both consumers and businesses. Credit availability is an important component of economic growth, and “India is currently one of the most under leveraged countries in the world,” says Desai, whose team thinks the ratio of credit to GDP could increase from 57% to 100% over the next decade.

Indian consumers are also likely to have more disposable income. India’s income distribution could flip over the next decade, and consequently overall consumption in the country could more than double from $2 trillion in 2022 to $4.9 trillion by the end of the decade—with the greatest gains going to non-grocery retail, including apparel and accessories, leisure and recreation, and household goods and services, among other categories. 

India's overall consumption could more than double as income distribution in the country shifts. 

Source: Source: Morgan Stanley Research (including estimates)

Energy Access and Transition

Energy is also key to economic development, as it impacts education, productivity, communication, commerce and quality of life. All of India’s 600,000-plus villages have access to electricity, due to recent upgrades to transmission and distribution, among other changes. This could boost India’s daily energy consumption by 60% over the next decade.

Although India will need to tap fossil fuels to meet its growing energy needs, an estimated two-thirds of India’s new energy consumption will be supplied renewables like biogas and ethanol, hydrogen, wind, solar and hydroelectric power. This could reduce India’s reliance on imported energy and improve living conditions in a country that is now home to 14 of 20 the most polluted cities in the world. It also creates new demand for electric solutions, such electric vehicles, bikes, and green hydrogen-powered trucks and buses.

“The rise in India’s energy consumption alongside the energy transition opens up a new segment to boost investment growth,” says Girish Achhipalia, India Utilities and Industrials analyst. “We believe this rise in capital investments will help to unleash a virtuous cycle of investment, with more jobs and income, more savings and in turn more investment.”

Investing In the India Decade

Investing in India is a long-term theme, and one that comes with its share of risks, including prolonged global recession, adverse geopolitical developments, domestic policy changes, lack of skilled labor, energy shortages and commodity volatility.

While there are distinct differences between India’s evolution and economic expansion in China, many investment themes that have played out or are playing out in China—including the growth of financial services, industrials and consumer goods—are gaining momentum.

“In the coming decade, as India’s economy transforms, we think that it will be increasingly relevant for global investors in a similar way that China is today,” says Ahya, adding that India’s next decade could resemble China’s path from 2007 through 2012. “We think that India offers the most compelling growth opportunity in Asia in the coming years.”

For more Morgan Stanley Research insights and analysis on India's growth outlook, ask your Morgan Stanley representative or Financial Advisor for the full report, "Why This Is India's Decade" (Oct. 31, 2022). Morgan Stanley Research clients can access the report directly here. Plus more Ideas from Morgan Stanley’s thought leaders.