India needs to grow at 8 per cent to overtake China to become the biggest contributor to global growth, from around 15 per cent at present to 20 per cent by 2028, said Barclays in its latest report released on Thursday.
At present, India and China together contribute more than 50 per cent to global growth, with China contributing 34.9 per cent and India 15.4 per cent.
"In a scenario of India achieving 8 per cent real GDP growth each year until 2028, versus the International Monetary Fund's 6.1 per cent forecast, India's contribution to global GDP would almost be on par with China in 2028, partly because China's contribution is also set to decrease. However, it is possible that these trends may come through earlier, and at lower thresholds of growth in both India and China, as the Chinese economy is slowing rapidly and may remain in a weak growth environment for longer," the London-based lender notes.
The report says that while the debt overhang and worsening demographics will hinder China's growth; strong and healthy balance sheets as well as demographic advantages look set to be inherent advantages for the Indian economy.
Besides, the report also notes that in the lead-up to the 2024 general elections, while the government has prioritised macro stability with a focus on inflation, as opposed to a spend-and-grow approach; post-elections, the new government may aim to return GDP growth to levels last seen in the 2000s without losing macro stability.
In order to achieve the desired growth rate without compromising its macro stability, the report recommends productive use of capital in the form of a falling incremental capital output ratio (ICOR), large domestic savings base including rising household financial savings, clean corporate and financial balance sheets, demographics, and the China+1 manufacturing build-out which is leading to rising global export share and friend-shoring.
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"While these incremental factors all positively contribute to growth even without an additional impetus, when improving in sync, they can create a virtuous cycle. Hence, the policy desired post-elections may be to further develop some or all of these factors, with the aim of triggering higher growth without necessarily losing macro stability," the report reads.
However, the report also warns that India needs to persist with fiscal consolidation and manage inflation on both supply and demand sides as an uncertain global growth backdrop due to geopolitical conflicts and financial stability issues in China pose significant challenges to India's growth.
"However, a key risk is that of rising economic populism, where weakness in states' fiscal positions, an often unnoticed element in Indian politics, is on the rise and has caused significant challenges for certain states, which have found it difficult to pay employee salaries," the report notes.