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India will be a $5 trillion economy and the third largest in the world by market exchange rates by 2027, aided by the demographic advantage and pace of financial sector development, Reserve Bank Deputy Governor Michael D Patra has said.
Delivering a speech at the 16th SEACEN-BIS High-Level Seminar hosted by the National Bank of Cambodia on Monday, Patra said it is widely believed that during the next two decades -- if not for longer -- the centre of gravity of the global economy will shift eastward to Asia.
The IMF’s Regional Economic Outlook for Asia and the Pacific indicates that this region will contribute about two-thirds of global growth in 2023 itself and India will account for a sixth of world output growth in 2023 and 2024, he said.
In terms of market exchange rates, he said India is the fifth-largest economy in the world and the third-largest economy on the basis of purchasing power parity.
"Our assessment is that by 2027, India will be a $5 trillion economy and the third largest in the world even by market exchange rates. A key driver in this transformation is likely to be the window of a demographic dividend that opened up in 2018 and will probably last till the 2040s, going by fertility and mortality rates," Patra said.
"We are the most populous country in the world at 1.4 billion and the youngest at an average age of 28 years. The other major catalyst of India's progress will be the pace and quality of financial sector development, which is the theme of my address today," he said.
For a high saving rate economy, like the rest of Asia, he said, a modern, efficient, and soundly functioning financial sector is essential for mobilising the resource requirements of India’s developmental aspirations.
While the jury is still out on whether economic progress is finance or demand-led, Patra said a wealth of empirical evidence points to Asia’s growth trajectory being that of the real economy leading financial development, and India is no exception.
There is also stylised evidence that the composition of the financial sector across Asia is changing, with hitherto bank-dominated systems giving space to alternative financial intermediaries like non-banks and capital markets, he said, adding these developments, in turn, generate impulses of growth for the rest of the economy.
In India, he said, additional dimensions have opened up exciting possibilities for leveraging our growth potential – the digital revolution; transformation of the payment and settlement ecosystem; and innovations in financial inclusion.
"More recently, India’s exponential expansion of the usage of space technology is reshaping every aspect of our lives, including the financial sector," he said.
The approach to the financial sector in India is reflecting a new paradigm in which macroeconomic and financial stability are seen as strongly complementary and providing the foundation for medium-term growth prospects, Patra noted.
Prudence is taking precedence over-exuberance, and this is reflected in the steady build-up of all types of buffers, he pointed out.
"In an overarching sense, this approach is reflected in the accumulation of foreign exchange reserves, which, as our experience has shown, has become our national safety net in the absence of a truly global financial shield. Besides providing the wherewithal to protect our financial markets and institutions from being overwhelmed by global spillovers, the reserves have helped to build bulwarks of external strength, as reflected in modest external debt servicing and debt to GDP ratios," he said.
"We believe that this is strengthening our capability to manage new challenges, such as climate change and cyber threats while maintaining public confidence and ensuring the financing requirements of India’s development strategy," he added.