India to pip Japan and become world's third-largest economy by 2028: BofAML

India is likely to become world’s third largest economy by 2028 and overtake Japan in nominal gross domestic product (GDP), projects a recent Bank of America Merrill Lynch report co-authored by Indranil Sen Gupta and Aastha Gudwani. The country, according to BofA-ML, is also well on track to cross France and the United Kingdom (UK) to emerge as the world's fifth largest economy after Germany by 2019.

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The report assumes the Indian economy will grow at 10% (in nominal US GDP) in the next 10 years, well ahead of Japan's 1.6%, and will be driven by the services sector. At the same time, various structural factors will likely weigh on growth in China, Brazil and Russia, BofA-ML says.

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The report sees three strong growth drivers over the next 10 years that will help India achieve this. First, falling dependency ratios should raise saving and investment rates. Second, financial maturity, due to financial liberalisation and inclusion, should continue to lower lending rates structurally. Finally, increasing incomes and affordability will likely underpin the emergence of mass markets, supporting an expected 7% real GDP growth.

Growth, according to BofA-ML will be driven by services, as India cannot replicate the export-led strategy of Asian tigers that was possible in a different world environment during the Cold War. 

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“It would be difficult for India to replicate South Korea’s export-driven industrialisation, as its dependence on oil imports implies India cannot depreciate its currency,” BofA-ML says.

Adding: “Services have climbed by 10% to almost 70% of world GDP in the past 20 years. Not surprisingly, they have also emerged as a key driver of India's growth as well. We believe India has to chart its path of domestic demand-led industrialisation that is relatively unique in the history of EMs. A natural corollary is that the impact of Indian growth on global markets will likely be driven by higher demand for commodities rather than manufacturing exports,” the report says.

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BofA-ML projects inflation at 6%, slightly lower than the long run 6.5% consumer price (CPI) inflation average, assuming relatively stable oil price inflation. Oil prices are expected to stabilise at $68/bbl over the next 10 years from $80/bbl in the past 10 years. The current account deficit should settle around the optimal 2-2.5%.