India is set to become the world's third-largest economy by 2028, reaching $5.7 trillion, driven by robust growth, policy stability, and rising consumer demand, according to Morgan Stanley. India's GDP, currently around $3.5 trillion, is projected to grow to $4.7 trillion by 2026. Domestic demand, buoyed by infrastructure improvements, income tax cuts, and public investments, is the key growth driver. Challenges include global economic risks and trade policies. Inflation is moderating, services exports are strong, and fiscal and monetary measures support sustained expansion.
India is poised to become the world's third-largest economy by 2028, driven by increased consumer demand, robust economic fundamentals, improved infrastructure, and policy stability, according to Morgan Stanley. Currently valued at approximately $3.5 trillion in 2023, India's economy is expected to reach $4.7 trillion by 2026, positioning it fourth globally, just behind the United States, China, and Germany. By 2028, India is projected to surpass Germany, reaching $5.7 trillion.
Tracing India's economic progression, Morgan Stanley noted that India ranked 12th globally in 1990, slightly dipped to the 13th spot in 2000, but then climbed to 9th in 2020 and further to 5th in 2023. India's contribution to global GDP is anticipated to rise from its current 3.5% to approximately 4.5% by 2029.
Morgan Stanley outlined three distinct scenarios for India's economic future. In the conservative "Bear" scenario, the economy would expand from $3.65 trillion in 2025 to $6.6 trillion by 2035. Under the moderate "Base" scenario, it would reach $8.8 trillion, and in the optimistic "Bull" scenario, the economy could grow to an impressive $10.3 trillion. Correspondingly, GDP per capita is forecasted to rise from $2,514 in 2025 to $4,247 (Bear), $5,683 (Base), and $6,706 (Bull) respectively by 2035.
"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," stated Morgan Stanley in its report.
Highlighting the broader implications, the report emphasized, "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."
Regarding recent economic trends, the investment bank observed signs of growth 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," it said. Morgan Stanley forecasts a GDP growth rate of 6.3% for the current fiscal year ending March 31, with a further improvement to 6.5% in the following fiscal year.
"Macro-stability should remain in the comfort range, providing flexibility to policymakers," the report added. Looking ahead, consumption is anticipated to rebound broadly, especially as urban demand is boosted by recent income tax reductions, complementing already strong rural consumption patterns.
Investment growth is expected to be fueled primarily by public and household capital expenditures, with a gradual revival in private corporate investments. Additionally, the services export sector's strength is set to positively impact the labor market, while moderating inflation should enhance consumers' purchasing power.
Morgan Stanley identifies domestic demand as the primary engine for growth, supported by favorable monetary and fiscal policies. Recently, headline consumer price inflation (CPI) has moderated from its earlier peaks, trending near 4%, largely due to easing food prices. Core inflation remains stable, and food prices—which constitute a significant 46% weighting in CPI—are expected to soften further. Consequently, inflation is projected to ease toward 4.3% year-on-year in fiscal 2026-27, down from the expected 4.9% in fiscal 2025.
In trade, robust service exports are partially offsetting sluggish goods exports resulting from subdued global demand. This dynamic is expected to keep India's current account deficit comfortably below 1% of GDP from fiscal 2025 to 2027, suggesting sustained external balance sheet strength.
On monetary policy, the Reserve Bank of India (RBI) is reportedly adopting a more accommodative stance through lower interest rates, liquidity support, and regulatory adjustments. After initiating an easing cycle in February, Morgan Stanley expects the RBI to deliver another 25 basis points rate cut in its April policy meeting.
On the fiscal policy front, the recent budget aims to reinforce economic recovery, particularly through income tax cuts aimed at stimulating consumption and prioritizing capital expenditures, all while maintaining responsible fiscal management to ensure macroeconomic stability.
However, the report acknowledges potential risks stemming largely 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. On the domestic side, we track fiscal profligacy at the state level and/or any change in policy mix that would weigh on macro stability," Morgan Stanley cautioned.
The most significant uncertainty facing India's economic outlook remains global in nature, including US economic policy and international growth trajectories. Morgan Stanley concluded, "A global recession or a near recession will challenge our call and keep the Indian equities off highs in 2025."
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