India's Rapid Growth: A Key Driver of Global Economic Expansion

India is one of the fastest-growing economies in the world, rapidly transforming into a key driver of global growth. Between 2000 and 2023, which includes the unstable years of the global financial crisis and the COVID-19 pandemic, India's average growth rate was 6.5%.

This sustained performance has enabled India to become the sixth-largest economy in the world, representing 8% of the global economy. Given its size, a 6.5% growth rate for India adds 0.52 percentage points (p.p.) to global growth. This means that India is responsible for a significant portion of the expected 3.2% global growth in 2024.

India has achieved this performance despite significant structural obstacles. International organizations and businesses have pointed to excessive regulation, heavy bureaucracy, disproportionate trade and labor market restrictions, and high transaction costs. Despite these challenges, India's strong growth momentum is expected to continue, contributing to improved living standards for a large part of its population. In 2000, India's GDP per capita was $442 and is expected to reach $2,500 in 2023, which is a lower-middle-income level according to the World Bank's classification. In about a decade, the country could surpass the upper-middle-income threshold of $4,465, nearly 10 times the per capita level two decades ago.

Real GDP Growth Rate of India (% year-over-year) Source: Haver Analytics, QNB Economics

India is expected to maintain its solid growth trajectory, continuing to be one of the fastest-growing economies, with growth rates of 6.4% in the coming years.

Firstly, high investment levels will stimulate global demand and increase production capacities. As a percentage of GDP, investment has recovered from the low levels seen after the global financial crisis and during the COVID-19 pandemic and is expected to remain above 30% in the medium term. This development is largely driven by the central government and state governments' investment expenditures.

Total Investment in India's GDP (% of GDP, annual) The central government's budget for infrastructure has more than tripled in the past five years, reaching $135 billion for the 2025 fiscal year. This figure almost doubles when including state-level expenditures. Infrastructure investments have a significant impact in a country with considerable needs. They will improve railways, highways, power grids, and waterways, among other critical infrastructure. For instance, the number of airports is expected to increase from 148 a few years ago to 200 by next year, which will be accompanied by significant growth in air services. Besides reducing logistics and transportation costs, government capital expenditures will encourage private sector investments. In fact, public investment is known to have the largest multiplier effect on economic activity and effectively encourages private enterprises to invest.

Secondly, a large, young, and growing population will provide an apparently endless workforce to support the expanding economy. India has recently surpassed China as the most populous country in the world, with a population of 1.4 billion. With a median age of 28, compared to 39 in China, the problem of an aging population, which is increasingly prevalent in other countries, is distant in this South Asian nation. Furthermore, the labor force participation rate is only 51%, which is 25 percentage points lower than in China. This difference is largely explained by the exceptionally low female labor force participation rate in India (25%), which is 46% lower than in China. These statistics highlight the considerable potential and encouraging trends in the growth of the labor supply, which will continue to support India's economic growth trajectory.

Thirdly, a comprehensive reform program is being implemented to strongly support productivity growth. Unlike other emerging economies in recent years, productivity improvement has been a significant factor in explaining India's economic growth. Labor law liberalization, which has already been encouraged in many Indian states, will contribute to a rebalancing of workers from agriculture to more productive sectors. According to the IMF, labor productivity in agriculture is only 2.3% of that in the most productive agricultural industries worldwide. Labor productivity in India's services sector is 18% of that in the most productive service industries. Given that 46% of India's workforce is employed in low-productivity agriculture, encouraging the transition of workers to more productive activities will give a significant boost to the economy.

The government is also making progress in negotiating new bilateral trade agreements and removing tariff and non-tariff barriers to trade. Indian producers will thus be exposed to healthy competition, which will help them increase their productivity. Reforms have already attracted significant investments in manufacturing and technology from multinational companies such as Apple, Samsung, and Boeing. In the future, the ongoing reform process will continue to play a crucial role in India's growth.

Overall, India is expected to maintain its rapid growth, with growth rates close to 6.5% in 2024 and 2025, and sustain a strong momentum thereafter, driven by contributions from capital, labor, and productivity.