India to overtake Japan as third largest economy by 2028: BofAML

India may emerge as the third largest economy overtaking Japan over the next ten years on the back of falling dependency, financial maturity and higher income and affordability, says a report by Bank of America Merrill Lynch.

“In 2028, we estimate it will overtake Japan in nominal GDP to emerge as the world’s third-largest economy ” said Indranil Sengupta and Aastha Gudwani, India economists at Bank of America Merril Lynch.

The report says that India is likely to cross Germany and Japan in nominal GDP in USD by 2028, assuming the economy grows at 10% in US dollar terms over the next 10 years, ahead of Japan's 1.6%. India is also well on track to become as the world's fifth largest economy by 2019.

Three strong growth drivers are expected to help India grow fast. First, falling dependency ratios is expected to raise saving and investment rates. Rising saving and investment rates, driven by falling dependency ratios, should fund an estimated 7% real growth. The report assumes build in 6% inflation and 3% depreciation to arrive at 10% nominal growth in US dollar terms.

Financial maturity, due to financial liberalization and inclusion, should continue to lower lending rates structurally. The credit to GDP ratio, a proxy for financial maturity, will likely climb to 83% of GDP from 44% in 2001-17 a driven by financial inclusion and financial market development among others. This, in turn, is expected to pull down interest rates.

Finally, increasing incomes and affordability will likely underpin the emergence of mass markets, supporting an expected 7% real GDP growth. The economists forecast emergence of mass markets powered by rising incomes, on the demand side, as well as economies of scale, on the supply side. A virtuous cycle is seeing higher affordability, as incomes rise, which allows manufacturers to hold the price line on economies of scale; this, in turn, reinforces affordability, the report said.