The pandemic-induced shocks to the economy which have already shaved off 15.7 per cent of the GDP from the previous year, will delay the ambitious target of becoming the third largest economy by three years to 2031-32 now, says a report.
Currently, the country is the fifth largest economy in the world behind Germany. The government has set a target of becoming a USD5-trillion economy by 2030.
"We now expect the domestic economy to emerge as the world's third largest economy in FY32, from FY29 earlier, due to the pandemic shocks. It should touch Japan's nominal GDP in 2031 (in USD terms) if it grows at 9 per cent and in 2030 if it grows at 10 per cent," a Bank of America (BofA) Securities report said on Monday.
The report however did not ascribe a size to either the domestic economy, which stood at USD 2.65 trillion in 2019-20, or to that of Japan, which in 2020 stood at USD 4.87 trillion.
This assumes a realistic 6 per cent real growth, 5 per cent inflation and 2 per cent rupee depreciation, the report added.
In 2017, BofA had predicted that the country would emerge as the third largest economy in 2027-28 based on its assumption of the demographic dividend, growing financial maturity, and the emergence of mass markets.
In their Monday's report, the house economist at the Wall Street brokerage said they find all these three phenomena strengthening now.
There are two other catalysts that support structural changes. For one, the RBI has effectively attained a silent revolution in re-achieving adequacy of forex reserves after almost eight years now. This should help stabilize the rupee by derisking the economy from global shocks.
Further, sustained policy easing is finally bringing down real lending rates that have been a drag on growth since 2016.
The only main downside risk to sustained growth is the oil prices, especially if it trends at over USD 100 a barrel.
If the GDP grows at 10 per cent, as BofA assumed earlier, this will be achieved in 2029-30 and if it grows at 9 per cent, overtaking Japanese economy will be pushed back by three years to 2031-32.
"Our projection of 6 per cent real growth is actually below the 6.5 per cent average since 2014 and our estimated 7 per cent potential," it said.
Also, for the growth to pick up and sustain, the credit to GDP ratio, a proxy for financial maturity, should climb to 102 in 2031-32 from 44 per cent in 2001-17 and 25 per cent during 1980 and the 1990s.
