Indian Economic Growth to Upper- Middle-Income Status

 India’s economy is projected to reach upper-middle income status by FY36. Will it mark a turning point for India? Let’s find out.

Boasting the fastest growth among developing G20 nations, India has set an ambitious goal: becoming a fully developed economy by 2047. With a robust 6.8% growth expected, India will maintain its status as the major growing economy. 

Over the next seven fiscal years, projections show India’s economy crossing $5 trillion, advancing towards $7 trillion, and growing 6.7% yearly on average. 

Source: CRISIL 

This trajectory should make India an upper-middle-income country by FY36, according to CRISIL.

What is an upper-middle-income economy?

The World Bank categorises economies based on their wealth. Upper-middle-income countries are wealthier, with a GNI (Gross national income) per capita ranging from $4,256 to $13,205. 

Source: World Bank 

Lower-middle-income countries are less wealthy, with a GNI per capita between $1,086 and $4,255.

Interestingly, despite housing a significant portion (75%) of the global population, many people in middle-income countries (62%) still face poverty. However, these same middle-income countries contribute significantly to the world economy, generating about one-third of the global GDP.

Taking India as an example, with a per capita income of $2,040 (as of FY23) based on the latest government data, India falls under the lower-middle-income category according to the World Bank’s classification system.

What is India’s current status? 

Before 2006, India was classified as a low-income country by the World Bank. There has been significant progress since then, with India moving to the lower-middle-income category in 2007. This classification remains unchanged as of today.

India aspires to become a developed nation with a $30 trillion economy by 2047. The realization of this objective is contingent upon various factors, such as the inflation levels, the actual rate of GDP growth, and the future exchange rate dynamics between the Indian Rupee (INR) and the US Dollar (USD).

The upcoming fiscal year (FY24) will be crucial in this journey, and India’s economic performance will be closely monitored.

What are the projections?

The credit rating agency highlighted that if India sustains a real GDP growth of 6.25%, it could ascend to the status of an upper-middle-income nation by FY36, with its per capita income potentially reaching $9,218 by FY47.

Interestingly, the agency also pointed out that an accelerated growth rate of 8% could propel India to hit the $15 trillion mark by FY43. The future trajectory of the Indian economy will hinge on the evolution of key factors such as real GDP growth, inflation (as measured by the GDP deflator), and the INR/USD exchange rate. 

The agency anticipates that India will transition into the upper-middle-income bracket between FY33 and FY36 and evolve into a $15 trillion economy between FY43 and FY47.

Despite the uncertainties associated with the ambitious $30-trillion target, CRISIL projections indicate that India’s per capita income could fluctuate between $9,218 and $9,920 from FY43 to FY47. This forecast positions India close to the threshold of high-income countries, which stands at $13,205 per capita.

What’s CRISIL batting on?

In addition to traditional economic indicators, CRISIL highlights several key elements that are shaping India’s economic path. 

These include the transition to renewable energy, the emphasis on low-carbon manufacturing and services, and the growth of the middle class.

India’s pledge to renewable energy, demonstrated at the COP26 Summit, establishes it as a significant contributor to the renewable energy sector. 

The country has set ambitious goals, such as achieving a renewable energy capacity of 500 GW by 2030 and transitioning to a net-zero economy by 2070.

Source: CRISIL 

The country’s commitment to low-carbon goods and services is evident in its initiatives, such as the commissioning of India’s first green hydrogen plant-based stainless steel manufacturing facility in March 2023. This focus is expected to significantly boost India’s economic growth.

Furthermore, the increasing income levels and aspirational lifestyle of the middle class are seen as major drivers for the demand for various goods and services. As per research on India’s consumer economy, the middle-class population is expected to see a significant increase, growing from 432 million in 2020-21 to 715 million in 2030-31 and further to 1.02 billion in 2046-47.

What are the challenges? 

India has set an ambitious goal of becoming a $30 trillion economy by 2047, thereby achieving the status of a developed economy. 

However, economists have pointed out that this journey towards $30 trillion could be fraught with challenges, as it would require the economy to grow at a rate of 9.7% per annum.

They further noted that in the past half-century, there have only been two instances when the economy experienced a growth rate higher than 9.7% per annum in USD terms for a decade: from 1973 to 1982 and from 2003 to 2012. They emphasized that no country has managed to maintain such a high growth rate for extended periods.

While the Indian economy is likely to have grown by 7.6% in FY24, experts predict a slowdown in growth in the upcoming fiscal year. 

Rating agency underscored that even sustaining a 7% growth rate over a prolonged period could be challenging without the backing of global demand and trade.

Regrettably, they pointed out that global demand and trade have become considerably restrictive since FY12.

Bottomline

India’s economy is projected to grow rapidly in the coming years, potentially reaching upper-middle-income status by FY36. However, achieving the ambitious goal of becoming a fully developed $30 trillion economy by 2047 faces significant challenges. 

While factors like a growing middle class and a focus on renewable energy are positive indicators, maintaining a consistently high growth rate and navigating a potentially restrictive global trade environment will be crucial. 

DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.