Reforms over the past year have created disruption in India's GDP numbers, but the medium-term potential looks bullish, and considering the growth trend, it could become the world's third-largest economy in the next decade, says an HSBC report.
According to the global financial services major, although reforms over the past year have caused disruptions that will likely mean lower growth rates in the near term, they should allow India to unleash more of its undoubted potential over the medium term.
"Although just 3 per cent of global GDP today, India's trend growth should see it overtake Japan and Germany to become the world's third-largest economy within the next decade," HSBC said in a research note.
India is caught between two worlds — one slowing and the other reviving — according to the report.
"The first India will be seen this year and the next (FY18 and FY19, year-end March). This India is experiencing weak growth across the main sectors," HSBC said.
It added that "the second India will appear on a three-year-plus horizon (FY20 and beyond) in our view. This India looks more attractive".
In line with this narrative, HSBC expects growth to slow from 7.1 per cent last year to 6.5 per cent over 2017-18 and 7 per cent in 2018-19, before moving higher to 7.6 per cent in 2019-20.
India's GDP growth slipped to a three-year low of 5.7 per cent in April-June as disruptions caused by demonetisation spilled over to the third straight quarter amid a slowdown in manufacturing activities.
By fiscal 2019-20 and beyond, HSBC said, the short-term disruptions of the current reforms would have settled.
"We have estimated that in the medium term, GST alone could add 40 bps to GDP growth emanating from its productivity and efficiency gains," HSBC stated, pointing to the resolution of "initial wrinkles" in other reforms such as the Bankruptcy Code and the Real Estate (Regulation and Development) Act (RERA) by then.
The report further said higher growth on the back of the productivity gains resulting from structural reforms would be "longer lasting".
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