May 30, 2024

India to become third-largest economy in the next three years, says Jefferies in a note

Global brokerage Jefferies sees India becoming the third largest economy by 2027 on the back of consistent GDP growth rate, supportive geopolitics, and continued reforms.

India will be third largest economy in by 2027. Over the last 10 years, India’s GDP has grown by 7% CAGR in USD terms to $3.6 trillion – jumping from the 8th largest to the 5th largest economy. Over the next 4 years, India’s GDP will likely touch $5 trillion, making it the 3rd largest economy by 2027, overtaking Japan and Germany, being the fastest growing large economy with the tailwinds of demographics (consistent labour supply), improving institutional strength and improvement in governance. 

The brokerage says India’s trajectory is “impossible for large global investors to ignore”. India’s market cap is currently the 5th largest globally (US $4.5 trillion) but India’s weight in global indices is still low at 1.6% (10th rank). This should change as market free float rises and some weight anomalies get sorted out. Assuming market returns in line with the last 15-20 year history and new listings, India will become nearly a $10 trillion, it further said in the note. 

Supportive global geopolitics: India has a vibrant democracy with 57 national/regional parties. Successive governments have adopted consistent growth and external relations policies. India has excellent relations with the western world, Japan, Australia and the Middle-East making it a key beneficiary of China+1.

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, 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. 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.

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