'India to become third largest economy by 2027, market cap to hit $10 tn by 2030'

India’ will be the world’s third-largest economy by 2027 and its gross domestic product (GDP) will likely touch $5 trillion, said Global brokerage Jefferies.

India will overtake Japan and Germany at being the fastest growing large economy with the tailwinds of demographics (consistent labour supply), improving institutional strength and improvement in Governance, said Mahesh Nandurkar, India Equity analyst at Jefferies.

“Over the last 10 years, India’s GDP has grown by 7 percent CAGR in USD terms to $3.6 trillion - jumping from the eighth largest to the fifth largest economy. Over the next 4 years, India’s GDP will likely touch $5 trillion making it the third largest economy by 2027,” Nandurkar said.

Where does India stand now?

India is now the fifth largest equity market in the world with the market cap likely to touch $10 trillion by 2023, Jefferies said.

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India has a consistent history of growing 10 to 12 per cent in USD terms over the last 10 and 20 years, it added.

Factors that will make India third-largest economy by 2027

“Continued reforms should maintain India’s fastest growing large economy status. Strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers valuation cushion. RoE-focused corporate sector with 167 companies having more than $5 billion market cap leave ample choices to investors,” Nandurkar said.

“Continued reforms should maintain India’s fastest growing large economy status. Strong trends in domestic flows have reduced market volatility and decadal low foreign ownership offers valuation cushion. RoE-focused corporate sector with 167 companies having more than $5 billion market cap leave ample choices to investors,” he added.

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Reforms: The brokerage noted that India has laid the foundation for 7 per cent long-term GDP growth. The implementation of GST in 2017 simplified taxation and improved trade efficiencies, similar to the formation of Euro. Bankruptcy reforms drove a massive cleaning up of corporate and banking sector balance sheets and improved governance.

Surge in market cap: Currently, India’s market cap is the fifth largest globally ($4.5 trillion), but India’s weight in global indices is still low at 1.6 per cent (10th rank). This will change as market free float rises and some weight anomalies get sorted out.

Global geopolitics: India’s relations with the western world, Japan, Australia and the Middle East along with other countries have been improving which could help the economy to grow as well, as per Jefferies.

Rising entrepreneurship: 10 years of investment downcycle and risk aversion trend has now inverted with housing upcycle and corporate debt-to-equity ratio at an all-time low. India is home to 111 unicorns (market value $350 billion) making it the third largest unicorn hub globally after the US and China. Govt’s focus on developing digital infrastructure, globally the cheapest data rates and the abundant homegrown talent pool have been the key drivers.

India, a services exports hub: Services export now accounts for nearly $450 billion/year. Several large global organisations have 10-20 percent of their employees based in India including companies like JP Morgan, Intel, NTT etc. Superior digital infra, and young & well-educated human resources should drive this segment to keep growing.

Strong corporate culture: RoE-focused corporate sector is a key positive for minority investors. Listed equity market is among the most diversified emerging markets. The strong institutional framework of regulators (SEBI, RBI), intermediaries (responsible asset managers) has helped develop a large domestic investor base. Sustainable investment habits give visibility of $50 billion/year flow into equities from domestic investors, which will likely keep the valuations on the expensive side but also reduce market volatility.

With inputs from agencies