India is forecast to overtake the UK to become the world's fifth largest economy this year and projected to surpass Japan to feature at the second position in the Asia-Pacific region by 2025, IHS Markit said Monday.
In a report on Prime Minister Narendra Modi and his BJP party's victory in the national elections, it said the economic outlook "looks positive" for the second term of Modi government, with GDP growth forecast to average around 7 percent per year over the 2019-2023 period.
"India is forecast to become the world's fifth largest economy in 2019, reaching a total GDP size exceeding $3 trillion, and overtaking its former colonial ruler, the United Kingdom. By 2025, Indian GDP is also forecast to surpass Japan, which will make India the second-largest economy in the Asia-Pacific region," it said.
As India continues to ascend in the rankings of the world's largest economies, its contribution to global GDP growth momentum will also increase. India will also play an increasingly important role as one of the Asia-Pacific region's major economic growth engines, helping to drive Asian regional trade and investment flows.
"A key policy priority for the Indian government will be to continue to drive reforms in the public sector banks and reduce the burden of non-performing (or bad) loans on their balance sheets," IHS said.
While manufacturing sector's share in the GDP is still at 18 percent against the target of 25 percent, around 7.5 million people are projected to join the Indian workforce per year on an average over the next two decades.
This, IHS said, will create strong pressure on the Modi government to generate sustained rapid employment growth in both the manufacturing and services sectors in order to prevent rising unemployment and underemployment in the Indian labour force.
"Moreover, the increase in India's total population between 2015 and 2050 (by around 265 million) is projected at around 350 million people, creating significant fiscal challenges for the government in order to deliver adequate physical infrastructure such as electricity, sanitation, affordable housing, and public transport," it said.
Continuing to drive the transformation of India's industrial sector through 'Make in India' strategy will also be a strategic priority, in order to improve manufacturing sector output growth and generate stronger employment growth, it said.
"When PM Modi launched the Make in India strategy in 2014, he set a target of increasing the contribution of manufacturing to GDP to 25 percent. However, by 2018, the manufacturing sector share of GDP is still at 18 percent, which still leaves a substantial gap to bridge in order to achieve this vision."
Despite significant achievements in infrastructure development during Modi's first term, rapid infrastructure development in key sectors such as transport and power infrastructure remain important priorities, as well as reducing the regulatory burden of government red tape.
India was ranked 77 out of 190 countries that are included on the World Bank's Ease of Doing Business Index for 2019.
"However, although India still lags behind other large emerging markets such as Turkey (43rd), China (46th) and Mexico (54th) on this ranking, India has made remarkable progress in improving its ranking compared with its ranking at 142nd out of 189 countries in the Ease of Doing Business ranking for 2015, which reflected a survey undertaken during the last year of the UPA Congress-led coalition government.
"This reflects the considerable efforts made during PM Modi's first term of office to try to reduce the regulatory burden of the Indian national and state bureaucracies on Indian businesses," IHS said.
IHS said the extent of BJP's electoral victory was "well beyond market expectations".
Since Prime Minister Modi took office in 2014, Indian GDP has increased by 50 percent, from $2 trillion in 2014 to an estimated $3 trillion in 2019, a total net increase of $1 trillion in GDP in just five years.