India’s $2.3tn economy is widely seen on track to hit the country’s long-term target of taking its place as the third largest, behind China and the US.
India will overtake Germany in 2022 as the world’s fourth-largest economy, based on an analysis of growth projections by the International Monetary Fund in 2017. 
Ranking countries and regions on their gross domestic product for 2017 and 2022 based on IMF forecasts, India, growing at 9.9% a year in nominal terms, will surpass Germany by 2022, with the UK dropping out of the top five after 2017.
So far, so good; but here’s the catch.
India risks being pushed into a crisis if the government sacrifices macroeconomic stability for growth, according to economists including IMF chief economist Gita Gopinath and the nation’s former central bank governor Raghuram Rajan.
To achieve macroeconomic stability, the nation needs to maintain low and stable inflation, ensure combined government budget deficit leaves room for private investment and keep a check on external-financing requirement, they said in a recent report.
There are widening areas of concerns, clouding the outlook for the economy.
India is part of the so-called ‘Fragile Five’ club - economies that are heavily reliant on foreign inflows and vulnerable to rising US interest rates. As bonds are being dumped and stocks and currencies weaken in emerging markets, sentiments have weakened on the rupee, Asia’s worst performer this year.
The currency has lost nearly 11% against the dollar this year. 
India’s current account deficit widened to a five-year high in September. A widening CAD is seen as a key risk for the economy and one of the main reasons why India became a target in a global EM selloff this year. 
Stunning electoral losses for Prime Minister Narendra Modi’s Bharatiya Janata Party in three key states last week have added to political uncertainty.
Most political strategists still expect the BJP to cling on to power, albeit with a smaller majority, in the federal elections due by May next year.
For sure, India’s demographics are considered better than China’s. An ageing population and low birth rates are causing the prime working-age population - aged 15-59 - to decline in China. From 2015-2040, this group is estimated to shrink by more than 115mn, whereas India’s prime working-age population will increase by 190mn. 
But the country now needs to take bolder measures to anchor long-term growth and employ a workforce that will become the world’s largest by 2030. 
Going deep, economists are also concerned about India’s banking system and the overall health of its public finances. 
India is seen as a laggard on productivity, too. Of the potential global oversupply of 90mn low-skilled workers in 2020, 27mn will be in India, according to a 2017 McKinsey Global Institute report. 
India, for sure, can dream big. But the country’s policymakers need to learn from mistakes committed in the past to adopt a more stable framework for monetary and fiscal policy. 
The shallow, short-term economic thinking should give way to a sustainable long-term growth vision to lift millions of Indians out of poverty and ensure social inclusion.

Related Story