The report assumes the Indian economy
will grow at 10% (in nominal US GDP) in the next 10 years, well ahead of Japan's 1.6%, and will be driven by the services sector. At the same time, various structural factors will likely weigh on growth in China, Brazil and Russia, BofA-ML says.
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The report sees three strong growth drivers over the next 10 years that will help India
achieve this. First, falling dependency ratios should raise saving and investment rates. Second, financial maturity, due to financial liberalisation and inclusion, should continue to lower lending rates structurally. Finally, increasing incomes and affordability will likely underpin the emergence of mass markets, supporting an expected 7% real GDP
“It would be difficult for India
to replicate South Korea’s export-driven industrialisation, as its dependence on oil imports implies India
cannot depreciate its currency,” BofA-ML says.
Adding: “Services have climbed by 10% to almost 70% of world GDP
in the past 20 years. Not surprisingly, they have also emerged as a key driver of India's growth as well. We believe India
has to chart its path of domestic demand-led industrialisation that is relatively unique in the history of EMs. A natural corollary is that the impact of Indian growth on global markets
will likely be driven by higher demand for commodities rather than manufacturing exports,” the report says.
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BofA-ML projects inflation
at 6%, slightly lower than the long run 6.5% consumer price (CPI) inflation
average, assuming relatively stable oil price inflation. Oil prices
are expected to stabilise at $68/bbl over the next 10 years from $80/bbl in the past 10 years. The current account deficit should settle around the optimal 2-2.5%.