India is on pace to pass the US on the list of the world’s biggest economies — but there’s a looming chance it squanders this promise

• India is expected to be the world’s second-largest economy by 2075.
• Challenges include red tape, high tariffs, and discouraging foreign investment.
• Strengthening ties with China could boost growth, but political issues could derail the move.

India is on pace to pass the US on the list of the world’s largest economies, according to Goldman Sachs, But as the South Asian giant moves towards economic superpower status, it must first overcome some looming obstacles.

According to a recent Goldman report, India’s economy is projected to top America’s around 2075, becoming the second-largest in the world. The economists estimate that China will have already moved past the US by that time.

India’s economic growth is fueled by several key factors, including its vast labor force, technological advances, and burgeoning capital investment. As our own Zahra Tayeb recently noted, market experts have “hailed the Asian nation as the next biggest investing opportunity,” having expressed bullish sentiments about India’s prospects, echoing the corporate interests of tech giants Apple, Tesla, and SpaceX.

A significant driver of this growth is innovation and technology, as noted by Goldman Sachs’s chief India economist, Santanu Sengupta.

“India has made more progress in innovation and technology than some may realize,” Sengupta said. “Innovation and increasing worker productivity are going to be important for the world’s fifth-biggest economy. In technical terms, that means greater output for each unit of labor and capital in India’s economy.”

However, India’s journey is not without challenges. The Goldman Sachs team noted that the biggest risk facing the country is if the labor force participation rate does not reverse its current 15-year downward trend.

“If you have more opportunities — especially for women, because the women’s labor force participation rate is significantly lower than men’s — you can shore up your labor force participation rate, which can further increase your potential growth.” the Goldman team wrote.

And as our Huileng Tan noted, foreign investors, including Elon Musk, are struggling to crack the market thanks to red tape, high tariffs, powerful tycoons, and a national push for self-reliance. Apple is another company that has struggled to enter the Indian market as it hopes to rely less on China as its primary chipmaker. These factors are already acting as barriers and could slow the influx of capital and future growth of their economy.

India also has an opportunity to strengthen their economic ties with China. Both sides could take advantage of “nearshoring,” a practice in which countries bring supply chains for crucial goods to countries that are close physically and politically, much like the US has done with Mexico. These Asian powerhouses can leverage proximity, reduce trans-Pacific shipping costs, and create a more effective regional trade network. 

Forging such an alliance would come with serious challenges: the two countries have a history of conflict over their shared border, and India has shown a general wariness of China’s rising military power. While there are serious political challenges, a stronger collaboration could fuel growth and influence the future of regional economics in a post-pandemic world. But there is still a lot of work to do.