India’s US$50 Trillion Value Creation Opportunity

Something fundamental has changed in India, and even casual visitors can feel it. A new confidence has taken root, based on the country passing a major structural inflection point Half a billion Indians have been brought into the financial system with bank accounts, debit cards, savings and insurance products and more, using technology, and that speaks to a level of execution that no one dreamed was possible, but has taken place in only a few short years.

In an otherwise recessionary world economy, India represents a rare bright spot for investors, with 2023 GDP growth projected at nearly 6%, more than twice the global average and nearly five times that of advanced economies. Having previously overtaken the UK’s and France’s GDP to also become the 5^th largest economy in the world, India’s economy is expected to grow to US$5 trillion in the next five years, passing Germany’s and Japan’s and becoming the world’s 3^rd largest before the end of this decade. Demographics are key to this growth with India passing China in March to become the world’s most populous country. Given its favourable demographics, by 2050, India’s economy is projected to grow to US$30-50 trillion, putting it on track to outgrow and catch up with the US and China in the second half of this century.

India’s rise in the coming decades will have profound implications for the world, and without it continued economic development the UN SDGs cannot be achieved, nor can the UN’s human security aims, given that they require delivering individual and societal security to 1.7 billion Indians in c.2050.

The closest precedent to India’s potential trajectory today is China’s rapid global economic ascendance in the decades from the 1990s onward. India is embarking on a similar transformation into a middle-income country, which given its sheer size, will lead to it become among the largest consumer markets and trading nations, globally. This transformation will also create globally scaled industries, and national ‘champions’ within them, creating significant value for investors in the process.

As India’s economy scales, this implies returns of 7-17x for investors by 2050, and an incremental US$20-50 trillion of shareholder valueⁱ . This makes India impossible to ignore and increasingly a critical piece of any global asset allocation strategy.

This month’s Sign provides a simple key to understanding the level of change underway and expected through a series of charts that map the scale and magnitude of India’s economic rise, the key demographic factors that will drive its economic ascendance, and the implications for investors in terms of the incremental value this rise will create.

I. Short Term Economic Numbers are About Trajectory

India is on track to become a US$5 trillion economy by 2027, and to pass Germany and Japan to become the 3^rd largest economy in the world by 2028.

1. India will generate US$2.2g trillion of incremental GDP in the next five years, equal to the incremental GDP generated over the last 15 years approximately (i.e., from 2007-2022).

2. India’s economy is increasing decoupling from other major economies, and while developed economies and China are slowing, India is expected to grow at c.6% average in real terms in the next five years, translating to c.9% growth in nominal US$ terms.

3. Its government is looking to drive growth to 7-8% or higher through (i) increased capital expenditure on infrastructure, (ii) fiscal consolidation driving increasing private investment, (iii) strong inflation management and (iv) tax reductions driving increasing consumption.

II. Demographics and Destiny

India’s young demographic profile, in comparison to rapidly ageing populations in China and the West, plays an important role in India catching-up with the US and China in the longer term.

1. Demographics have far reaching effects on production, innovation, trade, social security and pension liabilities, among other factors, in favour of those that have younger, working-age populations.

2. India’s working-age population will grow from c.1.0 billion to c.1.1 billion by 2050, one of the biggest drivers of the growth of the global workforce in the coming decades.

3. China’s and the developed world’s working age populations have started to decline and China’s will shrink by c.20% from 1.0 billion people currently to 0.8 billion by 2050, while the workforce in advanced economies will shrink by 8% from 810 million currently to 744 million by 2050.

4. India’s demographic advantage becomes starker in the second half of the century, and though its workforce will also shrink between 2050-2100, by the end of the century, India’s workforce would nevertheless be more than double China’s and four times as large as the US’.

III. Mass Consumerism and Mass Middle Class, in the Short Term

In the next decade, India will create a large, educated middle class, a key driver of global consumption, and a critical part of the global talent pool.

1. By 2030, India’s economy is projected to be powered by its c1.0 billion person middle class (rather than by the lower income population as today)_, with 80% of households expected to be “middle-income” by then (from 50% in 2018), and accounting for 75% of consumer spending^vi .

2. India’s middle class will be increasingly well-educated, and the number of Indian adults that have completed their schooling and some higher education will grow rapidly, doubling from 0.4 billion in 2020 to 0.8 billion by 2050^vii .

IV. Achieving China’s Rise Without Being China

India’s economy is similarly positioned to China’s c.2006, but its politics make it a natural partner for other democracies.

1. India’s rise in the next two decades will be similar to China’s transition from a lower- to upper-middle income country between 2006-2020, as its GDP will rise from US$2,400 per capita currently to c.US$9,000-13,000 by 2040 with significant implications for its economy and geopolitical position^ix .

2. Over this period India will add over 250 million voters to what is already the world’s largest democracy, whose emergence as a global superpower will shift the global balance of power in favour of democratic governance.

3. India’s structural reforms have progressed through multiple successive governments since liberalisation in 1991 including Congress, BJP, and multi-party coalition governments, suggesting a broad political consensus for reforms and developments across the country, and their ability to endure through transitions of power.

V. The Law of Compounding

By 2050, India will be a US$30-50 trillion , upper-middle income economy, rapidly catching up to the US and Chinese economies, and this holds true with a GDP growth rate of between 6% and 8%, illustrating the power of compounding [rather than economic genius].

1. India will grow to a c.US$30 trillion economy by 2050 based on its current baseline economic trajectory, demographics, investment, and productivity levels.

2. However, it has the potential to grow significantly faster if it can drive investment to c. 35-40% of GDP (vs. 32% currently) while maintaining its current levels of capital efficiency. This will require mobilising significant international and domestic capital.

3. This additional investment could unlock another c.US$20 trillion of GDP by 2050 and could lead to India effectively tripling its GDP between 2020 and 2030, if India accelerates by c.2% vs. its current baseline trajectory, with average growth of c.8% between 2023-2050 vs. the current baseline estimate of c.6%.

VI. Value Creation, Also Compounds

India’s growth has the potential to drive 7-17x returns growth for investors, creating US$20-53 trillion of incremental shareholder value by 2050^xi , which places India in the category of nations that can attract investment rather than philanthropy, and making the case for the spread of the drivers of success to other countries, particularly across the Global South.

1. India’s capital markets have matured significantly, and its market capitalisation has grown faster than GDP since 2013 and grown by $2.1 trillion to US$3.3 trillion in 2022 (while GDP grew by US$1.5 trillion over the same period).

2. India’s market cap can increase between seven- and 17-fold by 2050 creating an incremental US$20-53 trillion value for investors, with a market cap of US$5-8 trillion by 2030 and US$11-22 trillion by 2040. Key sectors that will drive India’s growth (e.g., financial services, education, healthcare, technology, infrastructure, consumer goods) will scale and create multiple national ‘champions’.

Conclusion: An Increasingly Essential Component of Global Asset Allocation Strategies

India is on a steep economic growth trajectory and its economy has reached a scale that will allow it to create trillions of dollars of economic and shareholder value in a relatively short amount of time. It is projected transition from a lower-middle income to an upper-middle income economy within a decade, and by 2050 India’s economy will scale to US$30-50 trillion, with a per capita income of US$17,000-31,000 crossing the threshold to a high-income economy.

With India’s fundamental drivers continuing to impact growth through the end of the current century, India’s economy, and by implication the global balance of economic power, will continue to evolve further. Looking far ahead, if this is the state of play, India’s economy would surpass the US by 2075^xiv and be close to passing China at that point too, given it would have an 861 million strong educated workforce, which would be 40% bigger than the US’s and China’s combined (at c.600 million workers).

Such rapid economic ascent from low, to lower-middle, to upper-middle to high income has few precedents. During the 20^th century Japan and the Asian ‘Tigers’ (Hong Kong, Singapore, South Korea, Taiwan) demonstrated that with focused investments in human capital, infrastructure and industry, Asian countries can rapidly ascend to western levels of national wealth.

However, in terms of speed and scale, China remains the only precedent, and it stands to be India’s likely rival for economic supremacy in the 21^st century. Between 2000 and 2022, China’s GDP grew 15x from US$1.2 trillion to US$18 trillion, to over 5x India’s. During this period, China scaled industries and disrupted the world economy in many ways through both supply and demand forces, created scaled and deep capital markets and investing opportunities, and generated tremendous value for many investors, making it an essential part of any global business strategy, and capital allocations.

Today however, China faces a series of demographic, geopolitical, economic and market challenges, with the balance of growth shifting towards India. This does not necessarily mean that India’s rise is pre-ordained, simply that there are several advantages – its demographics, its democratic polity and proximity with the west, its facility with English, and many such factors – that are stacked in its favour at the moment. If it can successfully leverage these advantages, it is a critical player in the world order. Indeed, given that China is widely expected to overtake the US somewhere between 2060 and as early as 2035 by some estimates, India’s alliance with the US provides the bridge that enables democracy to prevail as a defining component of the world order, (albeit with many assumptions built into such a statement.)

India’s rapid economic ascent into an upper-middle income and eventually high-income country will have profound and complex implications for India, the world, trade and capital flows and the global balance of geopolitical power. India already is (or will soon become) simply too big to ignore for businesses and investors alike. Large pools of capital, from North America, Europe, the Middle East, and Japan have already started to recognise this and are making scaled and strategic investments in India across asset classes. In the coming years, India will be a key source of growth and yield in a world that is otherwise facing serious economic, political, and social downside risks.

Importantly, India may well be too big to be allowed to fail. India’s profitable growth makes a strong case for investment, maximising the chance that global capital will flow to it and that development will follow. Sustainable development requires the inclusion of everyone, and this therefore is an essential ingredient in creating stability and attracting global capital. If India’s growth continues, the world has a chance of achieving the UN SDGs, and if this growth is sustainable, the world has a far better chance of achieving critical longer-term climate goals too.

Seen through the lenses of investment, global sustainability, and democracy and freedom, India is set to be a critical player for the world and its transition to a better future.

The Leader: Endnotes

1. Source: IMF World Economic Outlook, GPC Analysis (see end notes (x) and (xi) for detailed assumptions)

2. Source: IMF World Economic Outlook, April 2023

3. Source: UN Population Database

4. Ibid

5. Ibid

6. Source: World Economic Forum Insight Report (January 2019)

7. From Our World in Data with base data from Wittgenstein Centre for Demography and Global Human Capital (WIC)

8. Source: World Economic Forum Insight Report (January 2019), Wittgenstein Centre for Demography and Global Human Capital (WIC)

9. Data until 2022 from IMF World Economic Outlook; forecasts based on GPC Analysis; Range indicated is for Baseline Scenario (lower end) to High-Growth Scenario (upper end)

10. Source: IMF World Economic Outlook (for historical data), Forecast based on GPC analysis; Baseline Scenario assumes c.6% average real GDP growth between 2023-2050 (in line with current forecasts from IMF, GS Research and other analysts); Medium-High Growth scenario assumes c.7% average real GDP growth between 2023-2050; High Growth scenario assumes c.8% average real GDP growth between 2023-2050; All scenarios assume c.4% average inflation, and c.2% average annual depreciation vs. the US$

11. Source: GPC Analysis; GPC Analysis; Baseline Scenario (80-100% market cap / GDP), Med-High Growth Scenario (85-105% market cap / GDP), High Growth Scenario (90-110% market cap / GDP)

12. Source: Bombay Stock Exchange

13. Source: GPC Analysis

14. Source: Goldman Sachs Global Investment Research