Bank of America: Due to COVID-19, India catches up with Japan as one of the world’s largest economies

Apr 9, 2021

India was originally supposed to become the third-largest economy in the world by 2028 – Bank of America has now changed this forecast due to COVID-19. India, with its high population density, is suffering severely from the pandemic but should still make the leap, only a little later than originally expected.

The world’s largest economies are very powerful countries. According to Statista, the USA is first on the list, followed by China and Japan in third place. Germany is in fourth place, while India is only in fifth place. So far, the forecast by Bank of America (BofA) was that India would overtake Germany and Japan in 2028, thus working its way up to the top 3 largest economies in the world. In March, the BofA changed its forecast with reference to the pandemic.

India will catch up with Japan in 2031

BofA economists Indranil Sen Gupta and Aastha Gudwani commented in a recent report, “We now expect India to emerge as the third-largest economy in the world in 2031/FY32, from 2028 earlier, due to the Covid 19 shock,”

Economists are certain that if India’s gross domestic product (GDP) has an annual growth of 9% starting from now, the country will reach the GDP of Japan in 2031, taking third place among the largest economies in the world. If India’s GDP grows by 10% annually, this goal can be achieved as early as 2030.

S&P: India has lost 10% of its economic output

The change in the forecast is due to the repercussions caused by the pandemic. S&P Global reported a decline in India’s economic output of more than 9% in autumn last year. There were many COVID-19 cases, as well as a very long lockdown in India; many people have been left unemployed. According to the BofA Securities Report, mass production nonetheless keeps the country at an economically viable level.

According to economists, another reason is the falling birth rates. Fewer resources will have to be used for the old-age provision, and more can be invested in the economy as the dependency ratio is falling.

RBI increases foreign exchange reserves and stabilizes the Indian rupee

There are also two other factors driving economic growth – the Indian central bank, the Reverse Bank of India (RBI), has increased the country’s foreign exchange reserves, which has presumably stabilized the Indian rupee – which in turn could provide better protection against international volatility. The increase also brought more portfolio inflows and lower borrowing costs for Indian companies. Furthermore, the ongoing easing of the RBI is apparently leading to a reduction in real lending rates, which had slowed economic growth for about five years now.

Of course, the pandemic is not over yet, which is why India cannot do as much again as it did in 2019. The country is still classified as a COVID-19 risk area by the Federal Foreign Office, and there is talk in the media of a new mutation of the virus that could paralyze the country again. When making forecasts, the potential repercussions from the pandemic must always be taken into account, but with its unpredictability, this has not been easy.