S&P sees Indian economy growing by average 6.7 per cent to 2031

S&P Global on Thursday projected the Indian economy to grow by an average annual rate of 6.7% to March 2031, driven by manufacturing and services exports and consumer demand, despite short-term challenges from rate hikes and a global slowdown.

S&P retained its earlier forecast of 6% growth for the current fiscal year ending March 2024, noting even at this rate, India will be the fastest growing economy in the G20.

Last month, the International Monetary Fund raised its growth forecast for India by 0.2 percentage points to 6.1% for the current fiscal year, while the central bank has forecast 6.5% rise.

“While the world is in the midst of an unprecedented period of transition and uncertainty, India faces a defining opportunity to capitalize on this moment,” said the S&P Global in its report “Look Forward: India’s Moment” released in Delhi.

S&P Global expects the size of the economy to reach $6.7 trillion from $3.4 trillion in fiscal 2023, which could see per capita GDP rise to about $4,500.

If realised, India would overtake Japan and China to become the third largest economy in the world.

In manufacturing, new opportunities are expected to emerge from an accelerating global trend towards supply chain diversification, said the report, as the government offered incentives to manufacturers and improving infrastructure.

The economy is set to benefit from efficiency gains from tax reforms, state support to digital and physical infrastructure and reducing leakages from government subsidy transfers.

The Indian consumer market will more than double by 2031, surging to $5.2 trillion from $2.3 trillion in 2022, driven by rise in household incomes and higher spending on food and other items.

“Higher per capita incomes will also likely boost discretionary spending in areas such as entertainment, communications, restaurants and hotels,” said the report.

S&P Global said developing a strong logistics framework will be key in transforming India from a services-dominated economy to a manufacturing-dominant one, besides increasing female participation in the workforce to realize a demographic dividend.

“India’s ability to become a major global manufacturing hub will be a paramount test for its economic future.”

RBI intervention: The Indian rupee will trade in a narrow range over the coming three months and then strengthen slightly in a year as the Reserve Bank of India uses its vast foreign exchange reserves to keep the currency stable, a Reuters poll found.

Expected volatility in the rupee over the next three months was at its lowest in two decades as the Indian central bank continued to buy dollars, adding to its FX reserves of over $600 billion.

After falling over 10% in 2022, the rupee has gained just 0.2% so far this year and is unlikely to recoup those losses anytime soon, despite India retaining its title as the world’s fastest-growing large economy.

The July 31-Aug. 2 survey of 45 FX strategists forecast the rupee will remain largely unchanged at 82.00 to the dollar by end-October and strengthen about 1% to 81.67 in six months. It was trading around 82.58 on Wednesday.

Forecasts for the three-month period ranged from 80.67/dollar to 83.80/dollar, only slightly wider than the 80.88 to 82.95 range seen so far this year.

“I’m expecting the rupee to show some strength against the US dollar in the near term, which we expect to be showing broad-based weakness as the peak in US rates becomes apparent,” wrote Robert Carnell, head of research and chief economist at ING.

“If you look at the rupee, it has been exceptionally stable, far more stable than most other regional currencies, and that to me looks like there is a fair bit of intervention (from the RBI) happening.”

The RBI’s reserves, which had fallen to around $525 billion in October, have since risen by over $80 billion.

With rate cut expectations from the central bank pushed to the April-June quarter, over 70% of strategists who had a view, 25 out of 35, expect the rupee to strengthen against the dollar from here.

The currency was expected to strengthen nearly 2% to 81.00/dollar by the end of July 2024, with forecasts in a 78.83-85.80 range.

“Over the medium term we expect the rupee to appreciate,” said Dhiraj Nim, FX strategist at ANZ.

“A key risk will be a reversal in the RBI’s strategy of keeping the rupee rangebound or an alacritous rise in commodity prices. We don’t expect the RBI to front run the Fed’s rate cuts.”