India is set to emerge as the world’s second-largest economy, following China, by the year 2075, according to a recent research report by global investment banking company Goldman Sachs. The country’s rapid economic growth will be fueled by flourishing services exports, advancements in innovation and technology, and a conducive environment for private sector capital expenditure. However, the report also highlights a crucial downside risk stemming from the declining labor force participation rate in India.

Over the past 15 years, India has witnessed a decline in its labor force participation rate, with women’s participation rate significantly lower than that of men. The report emphasizes that if this trend persists and the labor force participation rate fails to pick up, it could pose a significant challenge to India’s economic growth prospects.

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Goldman Sachs Research’s India economist, Santanu Sengupta, commended India’s progress in digitalization and the implementation of the Aadhaar system, the world’s largest biometric ID system. With Aadhaar, India has achieved wider penetration of the internet, facilitating easier verification of identification for its 1.4 billion population. This has enhanced public service delivery, expanded access to credit for small businesses, and increased productivity, thereby positively impacting economic growth.

Furthermore, Sengupta emphasized that capital investment will play a crucial role in driving future growth. India’s savings rate is expected to increase due to favorable demographics, declining dependency ratios, rising incomes, and the development of a robust financial sector. The government has played a pivotal role in promoting investment by creating an enabling environment.

Traditionally, India’s growth has been driven by domestic consumption and investments, accounting for around 55-60% of the overall economy. However, macro imbalances have been reducing in recent years, partly due to inflation targeting and the resilience of services exports, which have helped cushion the current account balance.

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Although the World Bank has revised its growth projection for India, expecting it to slow down to 6.3% in the financial year 2023/24, the main reason cited is constrained private consumption due to high inflation. Similarly, the International Monetary Fund (IMF) has also revised its GDP growth forecast for India for the same period, lowering it by 20 basis points to 5.9%.

In conclusion, India’s trajectory towards becoming the world’s second-largest economy by 2075 appears promising, given its strong services exports, technological advancements, and favorable conditions for capital investment. However, addressing the declining labor force participation rate will be crucial to ensuring sustained economic growth. By leveraging digitalization and the Aadhaar system, India has the potential to further enhance its public service delivery, expand credit accessibility, and boost productivity, paving the way for future prosperity.

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