The next trillion dollars of GDP will come in just 5-7 years

The Indian economy is no longer at the crossroads; rather, it is on the right path to sustainable growth. Gross domestic product (GDP) growth of 8.9% in Q2FY11 is a resounding validation of the India growth story —- it has effectively endured a global crisis and the worst drought in 30 years.

India continues to be one of the fastest growing economies in the world. Its GDP is likely to grow at ~9% in FY11 and well into FY12. Growth should rise to double digits, on track with the higher growth trajectory of the last decade. However, the journey is unlikely to be smooth.

The fallout of the lack of radical reforms has shown up in high consumer inflation, which, though trending down, continues to persist. Rising global commodity prices are adding further fuel to the fire.

Interest rates are headed up. The speed with which India’s reforms process is progressing is less than desirable. Macroeconomic and business headwinds apart, markets have reason to be concerned about the serious and relentless issues of corporate and political governance, which India is currently embroiled in. While it will continue to encounter speed-breakers and roadblocks, India is well on its way to the next trillion dollars of GDP.

We published our first note on the concept of NTD (next trillion dollars of India’s GDP) in 2007. The core NTD thesis is this: It took India about 60 years post Independence to clock the first trillion dollars of GDP. With nominal GDP growth of 14-15%, at constant exchange rates, India’s next trillion dollars (NTD) will come in just 5-7 years. We juxtapose the NTD idea with the GDP growth experience of China to arrive at India’s GDP of almost $5 trillion by 2020.

As we have pointed out time and again, the addition of the next trillion dollars to India’s GDP has exponential growth implications for several businesses. Evidence of this is already springing up. Consider this: the number of passenger cars sold in October 2010 was 182,992, the highest ever in a calendar month in India’s history.

The Society of Indian Automobile Manufacturers forecasts that passenger car sales for the year ending March 2011 will grow by at least 25%. The Indian passenger car market is likely to treble over the next decade to six million cars a year. It is no surprise, therefore, that India has turned into a major battleground for global vehicle manufacturers such as Ford, Renault-Nissan, General Motors and Volkswagen.

India enjoys a special demographic advantage. With over 200 million households, India is not only a huge consumer market but also an attractive investment destination. Its consumer market is projected to become the fifth-largest by 2025, worth more than $1,500 billion. India’s total commerce, which was estimated at $2.3 trillion in 2007, is expected to treble by 2025, making it larger than the current size of the UK market in terms of purchasing power parity. India might well be at the helm of a radical realignment of the global economy.

The writer is CMD, Motilal Oswal Financial Services Ltd. Views are personal.