India's surging population is an economic virtue

There are no shortages of superlatives associated with India. It's the largest democracy. It's poised to overtake China as the most-populous nation with more than 1.4 billion people. It has the largest film industry based on movies produced.

And yet, what is perhaps most impressive is the performance of its economy. Over the last decade it has managed to surpass Canada, Brazil, Italy, Russia, France and UK in size, rising from No. 11 in the world to No. 5. India isn't stopping there. The country is likely to have the fastest-growing economy this year as much of the world teeters on the edge of recession. Gross domestic product is forecast to expand 6.9% in what promises to be the beginning of another decade-long trajectory higher, according to the 46 economists contributing their forecasts to Bloomberg.

Rising Up
India's economy has steadily expanded to become the fifth-largest in the world

By 2025-26, India will rival No. 4 Germany, whose GDP exceeded $4 trillion in 2021, and surpass Japan (almost $5 trillion of GDP) as the third-largest economy by 2027, Michael Patra, the deputy governor of the Reserve Bank of India, predicted in October at a central bank event. "Real income per capita is projected to achieve significant average growth of 5.3%, with India households becoming the greatest spenders among G20 economies," according to a November S&P Global Market Intelligence report. Inflation-adjusted GDP growth will average 6.3% annually over the next decade, S&P said.

At a point when US, Europe and other major countries' supply chains have been disrupted by the Covid-19 pandemic in China and sanctions against Russia for its war on Ukraine, India's global trade is experiencing unprecedented growth. Total exports of $960 billion, about an eighth of No. 1 China, increased 41% in 2021, or 15 percentage points more than China's, the widest divergence in at least three decades, according to data compiled by Bloomberg. Exports during the past five years advanced 56%, easily surpassing emerging economies (48%), China (42%), the US (24%), Germany (23%) and Japan (12%). The trading boom is a reversal of the previous five-year period when exports from India fell 12%.

Beating China
India's exports grew at a rate of 15 percentage points more than China's in 2021

Infrastructure spending encouraged by Prime Minister Narendra Modi's policies to improve roads, rail networks and ports makes India the No. 2 consumer of steel after China and spurred an insatiable appetite for energy. As a result, the 20 utility and power companies in the S&P BSE 500 Index experienced average sales growth of 91% during the past three years, more than double the average 45% for corporate India and making it the No. 1 industry. The market value of these firms increased 829%, or 3.5 times the average, according to data compiled by Bloomberg. 

"Electricity demand is largely driven by economic activities such as manufacturing and industrial sectors, as well as population and housing growth, which all seem to be booming in India," said Nikki Hsu, a utilities analyst with Bloomberg Intelligence.

Unlike most of its democratic counterparts in Europe, Asia and North America, which imposed sanctions against Russia last year after its invasion of Ukraine, India continues to be among the biggest buyers of discounted Russian oil and about 90% of the Indian army's equipment comes from Russia. While India kept its longstanding dependence on Russia since the dissolution of the Soviet Union, the balance in their relations increasingly benefits New Delhi. Here's how Derek Grossman, a senior defense analyst at Rand Corp. and adjunct professor at University of Southern California, put it in a recent edition of Foreign Policy magazine:

"Modi and his government are pursuing an ultra-realist foreign policy that deprioritizes the legal and moral aspects of international affairs to secure India's national interests. Although India's nonalignment is viewed by many in Washington as fence-sitting, its position may actually be stabilizing for today's international system: With India in no one's camp, the grand strategic prize that no one bloc can win diminishes each side's collective power against the others and thereby dampens the prospects for conflict. This, too, seems a net positive for upholding the international order."

In the meantime, the outlook for corporate India is only becoming more prosperous. The nation's 75 major publicly-traded consumer discretionary firms, a barometer of the domestic economy, expect their revenue to increase 17% this year and 15% in 2024, which should make the group the best-performing among 11 industries, according to data compiled by Bloomberg. 

Borosil Renewables Ltd., India's largest solar glass maker, plans to increase production five-fold on expectations that volatile global fuel prices will accelerate the shift to renewable energy. Sales will climb 86% in 2023 and 60% in 2024, according to analysts contributing forecasts to Bloomberg. Greaves Cotton Ltd., a manufacturer and engineering company that makes battery-powered two- and three-wheeled vehicles in addition to traditional autos, will see a 27% jump in revenue this year and 41% in 2024, based on analyst estimates compiled by Bloomberg.

None of these rosy scenarios would be possible without a population that expanded 5.2% to almost 1.4 billion between 2016 and 2021, a trend that has no counterpart among the four countries with a larger GDP -- the US, China, Japan and Germany -- according to International Monetary Fund data compiled by Bloomberg. While India will grow another 4.6% during the next five years, Japan and China will see their populations shrink as the US swells 1.5% and Germany sees a 0.2% increase.

Even the outlook for inflation in India, which is forecast to fluctuate between 6.7% and 5.1% over the next two years, is proving relatively benign when subtracted from GDP. Among the five largest economies, India's inflation-adjusted growth of 0.6% over 10 years is superior to the US (-1.2%), Japan (-0.2%) and Germany (-1.8%) and inferior only to China (3.7%) where growth is slowing the most in decades. 

The surest signal of India rising may be the bond market where the government's debt provided a 45% total return (income plus appreciation) during the past decade, more than 20 times better than the global emerging market when the benchmark for sovereign bonds lost 11%. A laggard between 2009 and 2013, India now is the pacemaker with superior one-, three- and five-year returns.

Matthew Winkler, Editor-in-Chief Emeritus of Bloomberg News, writes about markets. @Matthew_Winkler