If foreign investors want to grow their investments 8x in dollar terms over the next two decades, they should invest in India now. Even as war in West Asia roils global markets, India's trade agreements with both the US and the EU is the critical signal that long-horizon investors can ignore only at their peril.
Post-Covid, India has entered a phase of economic expansion that's both powerful and durable. By advancing structural reforms, India can sustain 8% real growth for the next two decades. This estimate rests on structural realities that set India apart.
Also Read: US-India trade deal is almost at finish line, says US Deputy Secretary of State Landau
Start with the sheer room to grow. India's per-capita GDP is roughly $3,000 today. Even after two decades of 8% growth, it would remain below $30,000, a level at which labour productivity has historically continued to climb. Then consider untapped labour and capital. India's female labour-force participation has nearly doubled in 6 yrs, rising from 23% in 2018 to 42% in 2024, and significant scope remains.
Nearly half the economy is still informal. So, formalisation alone can drive productivity gains for decades. Credit penetration, at about 60% of GDP, lags far behind the global average of roughly 180%. Given that India's leapfrogging in the digital economy, the potential for sound credit growth to fuel productivity is substantial.
Unlike advanced economies that must push the productivity frontier to grow, much of India's growth comes from catch-up, with some critical sectors also innovating at the frontier. Cross-country productivity data bear this out: India's productivity growth has averaged about 2.5% since 2014, nearly double the 1.3% recorded from 2002 to 2013.
Also Read: India’s $98 billion imports in hot water as West Asia tensions heat up
For foreign investors, this moment is exceptional because 8% real growth can deliver about 11% growth in nominal dollars. In the past, India's rapid growth carried a penalty. Over two decades ending in 2016, inflation exceeded 7% on average, pushing the rupee to depreciate by 3.5-4% annually, thereby diluting dollar returns.
That regime has changed. Following implementation of the inflation-targeting framework in 2016, inflation has averaged 5%, despite pandemic-era disruptions and war-driven commodity shocks. With inflation roughly 2 percentage points lower, rupee depreciation has correspondingly fallen to about 2.5% annually over the last decade, 1.5-2 percentage points less than the historical rate.
Note that these are averages measured over a decade, not movements over a few volatile months. In practice, the average results from extended periods of rupee stability, punctuated by brief episodes of sharp adjustment as has happened in the last few months.
Looking ahead, given the supply-side push following Covid, I expect inflation to anchor at 4%. The 3 percentage-point decrease in inflation (compared to 7% historical) would lead to a similar 3 percentage-point decrease in average rupee depreciation, settling it near 1% annually on average. This estimate is conservative: it doesn't factor in the possibility of higher US inflation driven by the US' considerably weaker fiscal position and growing threats to its central bank's independence. The estimate also does not account for faster real appreciation of the rupee from India's accelerating productivity and greater global integration in the traded sectors of the economy.
The economic arithmetic for 11% dollar return is simple: 8% real growth, plus 4% inflation, minus 1% depreciation. This projection is consistent with historical experience. Over multiple 25-year periods in the past, India has delivered more than 8.5% annual growth in nominal US dollars. Adding the 3 percentage-point reduction in inflation, you get 11.5% annual growth even using historical data.
At 11% annual return, investments double every 6-and-a-half years. Over two decades, that means three doublings. So, an investor who allocates $1 mn today could grow it to $8 million by 2047. No other large economy offers foreign investors such large multiplication in their investments.
Downside risks are primarily domestic: speed of structural reforms keeping pace with economic ambition. Policymakers must undertake necessary reforms to deliver average growth of 8% in the next two decades. Because 8% growth would increase our real per-capita income 1.5x by 2047 than if growth were only 6%.
Despite increased global uncertainty, citing the global economic situation as a cause for sub-8% growth can't stand up to scrutiny. Roughly 60% of India's GDP comes from domestic consumption, over 30% from domestic investment, over 10% from domestic government spending, and only 1.5-2% from foreign investment. Thus, nearly all of India's GDP stems from domestic factors with trade, as measured by exports minus imports, accounting for a small proportion.
The ongoing conflict in West Asia may temporarily elevate crude oil prices, but won't have long-run impact. A material risk stems from the impact of AI on software jobs, because these high-paying jobs matter significantly for domestic consumption.
India's fiscal and monetary policies have entrenched macroeconomic stability to complement its growth potential. Now, with landmark trade access to the world's two largest markets, the question that foreign investors must ask is not whether India will grow, but whether they will position themselves to benefit from it.
Post-Covid, India has entered a phase of economic expansion that's both powerful and durable. By advancing structural reforms, India can sustain 8% real growth for the next two decades. This estimate rests on structural realities that set India apart.
Also Read: US-India trade deal is almost at finish line, says US Deputy Secretary of State Landau
Start with the sheer room to grow. India's per-capita GDP is roughly $3,000 today. Even after two decades of 8% growth, it would remain below $30,000, a level at which labour productivity has historically continued to climb. Then consider untapped labour and capital. India's female labour-force participation has nearly doubled in 6 yrs, rising from 23% in 2018 to 42% in 2024, and significant scope remains.
Nearly half the economy is still informal. So, formalisation alone can drive productivity gains for decades. Credit penetration, at about 60% of GDP, lags far behind the global average of roughly 180%. Given that India's leapfrogging in the digital economy, the potential for sound credit growth to fuel productivity is substantial.
Unlike advanced economies that must push the productivity frontier to grow, much of India's growth comes from catch-up, with some critical sectors also innovating at the frontier. Cross-country productivity data bear this out: India's productivity growth has averaged about 2.5% since 2014, nearly double the 1.3% recorded from 2002 to 2013.
Also Read: India’s $98 billion imports in hot water as West Asia tensions heat up
For foreign investors, this moment is exceptional because 8% real growth can deliver about 11% growth in nominal dollars. In the past, India's rapid growth carried a penalty. Over two decades ending in 2016, inflation exceeded 7% on average, pushing the rupee to depreciate by 3.5-4% annually, thereby diluting dollar returns.
That regime has changed. Following implementation of the inflation-targeting framework in 2016, inflation has averaged 5%, despite pandemic-era disruptions and war-driven commodity shocks. With inflation roughly 2 percentage points lower, rupee depreciation has correspondingly fallen to about 2.5% annually over the last decade, 1.5-2 percentage points less than the historical rate.
Note that these are averages measured over a decade, not movements over a few volatile months. In practice, the average results from extended periods of rupee stability, punctuated by brief episodes of sharp adjustment as has happened in the last few months.
Looking ahead, given the supply-side push following Covid, I expect inflation to anchor at 4%. The 3 percentage-point decrease in inflation (compared to 7% historical) would lead to a similar 3 percentage-point decrease in average rupee depreciation, settling it near 1% annually on average. This estimate is conservative: it doesn't factor in the possibility of higher US inflation driven by the US' considerably weaker fiscal position and growing threats to its central bank's independence. The estimate also does not account for faster real appreciation of the rupee from India's accelerating productivity and greater global integration in the traded sectors of the economy.
The economic arithmetic for 11% dollar return is simple: 8% real growth, plus 4% inflation, minus 1% depreciation. This projection is consistent with historical experience. Over multiple 25-year periods in the past, India has delivered more than 8.5% annual growth in nominal US dollars. Adding the 3 percentage-point reduction in inflation, you get 11.5% annual growth even using historical data.
At 11% annual return, investments double every 6-and-a-half years. Over two decades, that means three doublings. So, an investor who allocates $1 mn today could grow it to $8 million by 2047. No other large economy offers foreign investors such large multiplication in their investments.
Downside risks are primarily domestic: speed of structural reforms keeping pace with economic ambition. Policymakers must undertake necessary reforms to deliver average growth of 8% in the next two decades. Because 8% growth would increase our real per-capita income 1.5x by 2047 than if growth were only 6%.
Despite increased global uncertainty, citing the global economic situation as a cause for sub-8% growth can't stand up to scrutiny. Roughly 60% of India's GDP comes from domestic consumption, over 30% from domestic investment, over 10% from domestic government spending, and only 1.5-2% from foreign investment. Thus, nearly all of India's GDP stems from domestic factors with trade, as measured by exports minus imports, accounting for a small proportion.
The ongoing conflict in West Asia may temporarily elevate crude oil prices, but won't have long-run impact. A material risk stems from the impact of AI on software jobs, because these high-paying jobs matter significantly for domestic consumption.
India's fiscal and monetary policies have entrenched macroeconomic stability to complement its growth potential. Now, with landmark trade access to the world's two largest markets, the question that foreign investors must ask is not whether India will grow, but whether they will position themselves to benefit from it.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Krishnamurthy V Subramanian