India could grow to a $6trn economy and achieve upper-middle income status by 2027

India could grow to a $6trn economy and achieve upper-middle income status by 2027

India is likely to be the world's fastest-growing large economy in the next ten years thanks to its focus on digitisation, according to a new report, which forecasts the country's GDP could hit US$6.1trn by 2027.

The country's long-term growth prospects are boosted by India's shift from a cash-dominated economy to one that is digitally enabled, helped by large scale-bank openings, increased mobile penetration, and a sharp decline in data charges, says Morgan Stanley's latest report, 'India's Digital Leap –  The MultiTrillion Dollar Opportunity.' 

Government reforms started in the early 1990s related to the ease of doing business have seen the country implement a real-time mobile payment system that allows C2C and C2B payments, an Quick Response or QR code system and a real-time bill payment system.

Significantly, the country has also benefited from the recent implementation of a long-awaited goods and services tax (GST).

Designed to transform India's indirect tax landscape, GST was launched on 1 July with the aim of gradually shifting the informal sector into the formal sector, leading to greater compliance and higher tax collection for the government.

It has proved controversial for the country's garment and textile industry, which saw protests by more than 70,000 synthetic textile traders ahead of its implementation.

While the GST is supposed to simplify sales taxes for clothing and textile companies, replacing a myriad of national, state and local charges, it will force most businesses to report every transaction on the government's taxation portal. Only those with annual sales under INR2m (US$31,000) are exempt, and this is upsetting smaller traders who do not want to undertake such bookkeeping.

GST, however, is completely digital and an online platform – arguably the largest digital tax network in the world, with the scale of operations staggering, according to Morgan Stanley. The network is expected to manage 30-40bn transactions paid annually by almost 10m tax-paying entities, which implies 100m transactions daily.

Morgan Stanley believes GST, with its ability to clean up India's messy indirect taxation and lift government revenues, has the potential to boost growth. From the corporate sector's perspective, warehousing costs, freight costs, and inventory levels could all fall. Over the next two to three years, large companies could gain share from small and medium sized enterprises (MSMEs), while the entry of MSMEs into the formal economy will eventually lift their growth.

"The strength of MSMEs should help augment the supply chain," the report explains. "Currently, the number of merchants selling on online platforms such as Flipkart is around 150,000. Amazon India currently has 160m products listed on its platform, versus 400+ million for Amazon in the US. We expect the numbers in India to increase meaningfully as more merchants enter the formal economy and have better access to credit."

India's economy already had strong growth prospects for the next ten years, and Morgan Stanley believes the country will achieve upper-middle income status by 2027.

Favourable demographics – over the next ten years 122m people are expected to enter the workforce – globalisation and government reforms are all contributing. Additionally, with over 900m internet users in 2026, over half of whom shop online, the report forecasts India's e-commerce market could grow to $200bn by 2027, making it one of the most attractive opportunities globally.

This growth is being driven by a combination of rising internet penetration, a drop in data access costs, a shift to smartphones and a flow of credit to consumer and micro enterprises.

Against this backdrop, Morgan Stanley predicts India will receive gross FDI inflows amounting to $120bn by 2027, almost double the current 12-month trailing run rate of $64bn.