In today’s Finshots, we talk about India’s magnificent growth trajectory and whether we should celebrate it yet.

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The Story

India’s economy is on an incredible run. The IMF says we’re just a year away from overtaking Japan to become the world’s fourth-largest economy — right behind the US, China, and Germany. And if we keep this pace, Germany could be next.¹

By 2047, the numbers get even flashier. We could be a $35 trillion economy, contributing a hefty 20% to global growth!

Exciting times, right? And this isn’t just happening on paper. There are clear signs of this growth at ground level.

Take rural India, for instance. People have more cash to spare. FMCG companies are seeing higher sales of basics like soaps and biscuits. Even demand for the rural job scheme MGNREGA is falling because better-paying jobs are luring people away. And salaried jobs are on the rise too, jumping to 21%.²

Then there’s the construction boom. Highways, bridges, and metros are cropping up everywhere, thanks to over $100 billion in annual infrastructure government spending. Manufacturing, too, is getting its second wind. Production-linked incentives are drawing global giants to set up shop in India. Apple, for example, is set to manufacture over 20% of its iPhones here by 2025.

The services sector is no slouch either. Here, IT and business consulting are making significant waves. And here’s another big one - women are entering the workforce in unprecedented numbers. Back in 2017, only about 20% of women aged 15 and above were part of the labour force. Today? That number has climbed to over 37%!³

And lastly, India’s fintech revolution continues to redefine the governance playbook. Aadhaar, UPI, and DigiLocker are rewriting the rulebook. They’ve reduced corruption, streamlined governance, and saved the government 1% of GDP up to March 2021. These savings have gone into building infrastructure and funding social welfare.

So yes, it’s no wonder India is wearing the badge of the world’s fastest-growing large economy with pride.

But before we pop the champagne, let’s pause for a second and ask - Is this growth enough?

Because, for all its promise, India’s growth story has a few worrying gaps.

You’ve probably heard about the demographic dividend. It’s that golden period when the working-age population in a nation outnumbers the dependents. Well, India’s right in the middle of it. But this window is closing fast as the share of young people is projected to decline over the next 15 years. And the problem? We’re not creating enough high-skill jobs. So, a large chunk of the working population is still stuck in low-paying agricultural work or spending years preparing for competitive exams. And so, our education and skill development systems just aren’t keeping up with the times. For perspective, for every 10 young people in India in FY23, just about one had a job.⁴

China’s story offers some perspective on growth as well. See, when China overtook Japan in 2010 to become the second-largest economy, Japan’s share of global GDP was over 8%. But when India surpasses Japan, its share will be under 4%.⁵ India’s climb is significant, but it won’t have the same global impact as China’s did.

There’s also the workforce issue. India’s labour force is only three-quarters the size of China’s, largely because fewer women are employed. And that’s a problem. If half the population isn’t contributing to the economy, we’re not firing on all cylinders. While social shifts could change this, some projections suggest India’s labour force might not surpass China’s until the 2050s. And while female labour participation has risen sharply in recent years, it’s still miles behind China’s impressive 60%.

This imbalance makes it harder for India to become a global manufacturing hub as well. We’re struggling to fully capitalise on the China+1 strategy, where companies diversify manufacturing away from China. Even if we hit the government’s $1 trillion goods export target by 2030, we’ll only account for 3% of global trade — a milestone South Korea reached years ago.

Sure, services are growing, with India’s global exports projected to hit 6% by 2030. But here’s the thing: services alone can’t replace the transformative impact that a robust manufacturing sector has on global supply chains and employment. Think about it. The textile industry in India employs 4.5 crore people, while the IT-BPM (business process management) sector employs just 55 lakh.⁶

And don’t forget the savings problem. India’s gross savings rate hovers around 30%, which isn’t enough to fund the infrastructure and the development we need. Unlike China, which powered its rapid industrialisation through a domestic savings glut, India depends heavily on foreign investments. But foreign money can only go so far in addressing our structural funding and infrastructure gaps.

So yeah, India’s economic rise is undoubtedly worth celebrating. We’re making big strides and that’s commendable as well as beneficial for the economy.

But it’s also important to temper that excitement with a dose of realism, especially when there’s a growth projection out every now and then, right?

Afterall, overtaking Japan could be an achievement, but it’s not the end of the race. To truly cement our place in the global economic hierarchy, we need to focus on creating high-skill jobs, bridging the gender gap in the workforce, as well as boosting domestic savings.

The clock is ticking on our demographic dividend, and the stakes couldn’t be higher. The question is will we seize this golden opportunity or let it slip away?

What do you think?

Until then…

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Story Sources: BBC [1]; Deloitte [2]; PIB [3]; India Today [4]; The Economist [5]; The Hindu [6]

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