Despite global economic uncertainties, India is set to become the world’s third-largest economy by 2028, according to Morgan Stanley’s latest report. The country’s share in global production is increasing, driven by macroeconomic stability, policy measures, and enhanced infrastructure. India is projected to surpass Germany’s GDP to secure the third position in the global economic rankings.
By 2026, the Indian economy is expected to grow to $4.7 trillion, placing it as the fourth-largest economy after the U.S., China, and Germany. By 2028, India will surpass Germany with an estimated GDP of $5.7 trillion.
Morgan Stanley’s data traces India’s economic progress over the decades. In 1990, India was the 12th-largest economy in the world, slipping to 13th place in 2000. However, it climbed back to ninth position by 2020 and then further to fifth place by 2023. The report projects India’s share in global GDP to increase from 3.5% in 2023 to 4.5% by 2029.
Three Possible Economic Growth Scenarios
Morgan Stanley outlined three possible growth trajectories for India’s economy:
- Bear Scenario – The economy expands from $3.65 trillion in 2025 to $6.6 trillion by 2035.
- Base Scenario – India’s GDP grows to $8.8 trillion by 2035.
- Bull Scenario – The country’s economy could reach $10.3 trillion by 2035.
GDP per capita is also expected to rise significantly across these scenarios. By 2035, under the Bear scenario, it could reach $4,247, while in the Base scenario, it may increase to $5,683. Under the Bull scenario, GDP per capita could rise as high as $6,706.
India’s Growing Global Economic Influence
The report emphasized that India is gaining prominence in the global economy due to strong foundational factors. “India is likely gaining share in global output in the coming decades driven by strong foundational factors, including robust population growth, a functioning democracy, macro stability influenced policy, better infrastructure, a rising entrepreneurial class and improving social outcomes,” Morgan Stanley stated.
The report further highlighted India’s growing attractiveness as a key consumer market. “The implication is that India will be the world’s most sought-after consumer market, it will undergo a major energy transition, credit to GDP will rise and manufacturing could gain share in GDP,” it noted.
Economic Growth on the Path to Recovery
According to Morgan Stanley, India’s economic growth is already showing signs of recovery. “High-frequency indicators were mixed in recent weeks but are distinctly better than a couple of months ago. We expect growth to recover after a 2H24 (second half of 2024) slowdown on fiscal and monetary policy support, with recovery in service exports,” the report said.
For the financial year ending March 31, 2025 (FY2024-25), India’s GDP is expected to grow at a rate of 6.3%, rising to 6.5% in the following fiscal year.
“Macro-stability should remain in the comfort range, providing flexibility to policymakers,” the report noted. The recovery in consumption is projected to become more widespread, aided by income tax cuts that are expected to boost urban demand, while rural consumption levels remain strong.
Public and Household Capital Expenditure to Drive Growth
Investments are expected to play a crucial role in India’s economic expansion. According to Morgan Stanley, public and household capital expenditure (capex) will be the primary drivers of growth, while private corporate investments are anticipated to recover at a gradual pace.
Additionally, the strength in services exports is expected to have a positive impact on the labor market. This, combined with moderating inflation, is likely to improve overall purchasing power.
Domestic demand, supported by policy initiatives on both the monetary and fiscal fronts, is projected to be a key contributor to economic expansion.
Inflation Expected to Stabilize at 4.3% by FY27
Inflation has shown signs of cooling, with headline Consumer Price Index (CPI) inflation decreasing from its recent peak, now hovering near 4%. This decline is primarily attributed to falling food prices. Core inflation has remained stable, contributing to overall economic stability.
Morgan Stanley expects inflation to reach 4.3% in FY2026-27, down from an estimated 4.9% in FY2025. The outlook for inflation remains contingent on food prices, which account for 46% of the CPI basket and are expected to soften further in the coming months.
Current Account Deficit Remains Under Control
Despite weak global demand affecting goods exports, India’s strong service exports are helping to balance its trade position. As a result, Morgan Stanley expects the country’s current account deficit to remain below 1% of GDP in FY2025-27, ensuring continued stability in India’s external balance sheet.
Possible Rate Cut by RBI in April
On the monetary policy front, the Reserve Bank of India (RBI) has been easing policies across multiple areas, including interest rates, liquidity measures, and regulatory changes. In February, the RBI initiated a rate-cutting cycle, and Morgan Stanley anticipates another 25 basis points (bps) reduction in April.
Fiscal Strategy: Encouraging Consumption and Capital Expenditure
India’s fiscal policies aim to sustain economic recovery by boosting consumption through income tax cuts and prioritizing capital expenditure (capex). At the same time, the government is maintaining macroeconomic stability by ensuring fiscal discipline.
Global Risks: Trade Wars, U.S. Federal Reserve, and Market Conditions
While India’s economic trajectory appears strong, risks remain, particularly from external factors. “We closely monitor developments on trade and tariff policies by the US government, alongside the strength in the dollar, Fed’s reaction function and global growth and financial conditions,” Morgan Stanley stated.
Domestically, the report warned of potential risks, including excessive government spending at the state level or shifts in policy that could undermine macroeconomic stability.
The most critical factor influencing India’s growth trajectory will be global conditions, including U.S. economic policies and worldwide growth trends.