India’s Flywheel to the $10 Trillion GDP Target and Beyond

India exited FY23 strongly with a nominal GDP of $3.4 trillion (₹273 lakh crore) and is now the fifth-largest economy in the world. It grew at a phenomenal 16% in FY23 (following 18.4% in FY22) in nominal terms, continuing to beat multiple forecasts that growth would slow down post the pandemic. India stands as the fastest-growing large economy in the world that has seen most large economies slow down significantly. The April 2023 update of the World Economic Outlook predicts India to remain the fastest-growing economy in FY24, as have other major economic institutions.

Over FY24, budgeted real growth is pegged at 6.5% – the highest among large economies worldwide. Adding inflation of 4-5%, nominal growth could reach 11-12% catapulting India's nominal GDP to ₹303 lakh-crore ($3.7 trillion). At the same growth rate, nominal GDP could reach ₹338 lakh-crore ($4.1 trillion) in FY25.

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Achieving the $5 Trillion GDP Target this Decade

India's GDP in dollar terms has always been impacted by the declining rupee, a function of the high trade deficit which makes the currency sensitive to foreign currency flows. When GOI announced India's target of reaching $5 trillion GDP in 2025 back in 2019, it was at a constant conversion of $1 to ₹75. At this rate, ₹338 lakh-crore in FY25 translates to $4.5 trillion - a remarkable feat when you factor in the pandemic-induced GDP decline worldwide. India could realistically meet the $5 trillion target by CY26, even at the higher dollar-to-rupee dynamic, making it the definitive third largest economy globally. By most projections, it will definitely be the third-largest by CY28.

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India's Historical Growth is the Foundation for its $10 Trillion Target

The Indian economy has outperformed most large economies since its 1991 liberalisation. It has grown from a 1991 GDP of ₹5.32 lakh crore ($275 billion) to ₹272 lakh crore ($3.47 trillion) in FY23. This translates to a robust CAGR of 13.08% in nominal rupee terms, and 8.24% in dollar terms over 32 years. No other country except China has achieved this tremendous feat, and India has laid strong foundations for its GDP leap forward from here. India is now on the path to surpass $10T in GDP over the 2030s.

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Between 2014 and 2023, GDP grew from ₹113 lakh crore to ₹273 lakh crore, an addition of ₹159 lakh crore. When the NDA completes its second term in 2024, GDP would be around ₹303 lakh crore, an increase of ₹190 lakh crore over a decade, growing from $2 trillion to $3.8 trillion. China is the only large economy to register faster growth over three decades.

India’s unpredictable feat is a testimony to the entrepreneurial spirit of the Indian people. This spirit provides a solid foundation for India's goals of growing to $5 trillion on the way to $10 trillion over this decade. Along this trajectory, the nation will grow into the third-largest economy globally from the current fifth. China pioneered a higher growth rate by liberalising its economy strategically back in 1978 with an export-first growth strategy followed by a sequential building up to hi-tech sectors. However, despite all its challenges, India has grown robustly over these 32 years.

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India Will be +$20 Trillion by 2050

More importantly, this exceptional GDP growth lays a solid foundation for India's leap towards a $10 trillion GDP and beyond. India will be the only country besides the US and China to breach the $10T GDP mark even until 2050, per Goldman Sachs. By 2050, India will be +$20T. Only the US and China will accompany India past the double-digit trillions mark.

Resilience Amid Global Crises

India's 32-year strong growth cycle has weathered many global crises like the pandemic, the 2008 global financial crisis, the 2000 bubble, and the 1997 Asian crisis. During the pandemic, the economy declined by 3% - a rare feat for India followed by a strong rebound of 18.5% nominal growth in FY22. This demonstrates that the economy is fundamentally resilient and has a variety of factors driving its growth.

The country’s large and consistent internal demand, more efficient market practices, rapid formalisation, intense capex expansion, growth in local manufacturing, and intentional shift towards renewable energy are multiplexing to support a national fabric of resilience against global uncertainty.

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India's IT Industry: A $260 Billion Powerhouse of Innovation

India’s technology and innovation ecosystem is built on top of the strong fundamentals of the country’s IT industry. Originating as a services business in the 1980s, it has evolved into a leading export force, contributing significantly to India's global standing.

The Indian IT has delivered a combined revenue of $260 billion over FY23, with over $200 billion in services exports. Having employed over 5.5 million (55 lakh) people collectively, this industry has greatly contributed to help balance the USD reserves of the central bank, enhanced the standing of the Indian professional globally, and now list amongst the best stocks in Asia as part of the cohort. Five out of the top ten and three out of the top five IT companies globally are now Indian.

This industry is India’s strongest competitive advantage - it will help reduce the balance of payments and strengthen the currency. India's current account deficit (CAD) dropped from $17.9 billion (2.1%) in Q1:2022-23 to US$ 9.2 billion (1.1% of GDP) in Q1:2023–24. As India’s IT, engineering, and services exports continue to grow, startups can also accelerate this important shift and contribute positively to build a structural advantage for the economy.

India’s startups have been built on the shoulders of these giants. Two generations of India’s engineering and business talent have been trained on global standards of software development, maintenance, delivery, and sales globally. The US-India bridge is amongst our most well established business channels thanks to Indian IT. India’s remittances are greatly enhanced by the large population (over 2 million) of NRIs working globally for IT and tech companies. It is, therefore, clear to see how Indian startups have had a running start to catch up with other developed and leading economies.

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Tracking the Phenomenal Growth of Indian Startups (2014-2023)

India now hosts the third largest startup ecosystem in the world after the US and China. Inc42's analysis shows that while $136 billion entered the Indian startup ecosystem between 2014 and 2022, this number pales compared to the $837 billion and $2.7 trillion that entered the Chinese and US ecosystems, respectively, during the same period.

Over CY 2022 and 2023, $35 billion has been invested in Indian startups. As we enter 2024, the ecosystem is tracking 105+ soonicorns. We expect at least $15 billion to be deployed into Indian startups this year, unlocking potential for further growth.

The total value created by the Indian startup ecosystem has surpassed $500 billion, with estimates projecting it to reach $1 trillion by 2028. This is accompanied by 18 tech IPOs completed and over $6.4 billion returned as exits via M&As. Over $6.4 billion has been returned as exits via M&As, while over $60 billion has been returned via exits cumulatively across Indian PE-VC just over 2021 and 2022. The past three years have seen India’s PE-VC ecosystem go from strength to strength, experiencing an exceptional bullish run with more than $60 billion in deal value unlocked each consecutive year since 2020.

India is ahead of many developed economies such as the UK (~50 unicorns), and Germany (<40 unicorns). 2021 has been an inflection point in India’s start-up story, reflected by the doubling of its unicorn base. Unforeseen utilitarian and lifestyle changes induced by the pandemic have accelerated digital adoption in what was already a fast-growing economy. In 2021, for the first time, India has also outpaced China in the absolute number of unicorns created per year.

Investing momentum was driven by a significant confluence of factors that were several years in the making: maturing digital infrastructure (Unified Payment Interface [UPI]-led payment rails, cheap and ubiquitous data access and Aadhar electronic Know Your Customer [eKYC]), increasing depth in the start-up ecosystem and reinvigorated investor confidence as long-held capital saw significant public and secondary exits, and a positive macroeconomic outlook for India. Further, as Chinese regulators tightened control over the local tech economy (fintech and edtech), capital deployment saw redirection to India.

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VC Expansion in India is Backed by Global Allocator Interest

Globally, VC as an asset class has expanded significantly over the last decade. India is a scale ecosystem for the asset class now and has witnessed the most significant growth. It is now the third largest ecosystem for annual funding, seeing a 17x increase over the last 8 years.

Moreover, a majority of the $136 billion invested comes from global investors – venture capital (VC) funds, sovereign funds, crossovers, and institutional investors like insurance companies and pension funds of other countries. The explosive Indian growth story is now a default on every global investor's Asia allocation, and they are reaping robust returns via active exits from M&A, IPOs, and secondary sales. Over 2,780 active global institutional investors are now active in India.

As global markets correct after a series of macro and geopolitical events over FY23, Indian startups have anticipated a continuing season of selectivity from investors. Having already been through a trying set of experiences in 2020, most startups have emerged more resilient, more aware of the levers under their control, and with a firmer focus on baseline sustainability. So many of the market leaders have been through a hyper growth phase since. Now is the time to introspect, build the connective tissue to align their leadership and organisations, and focus their aggression on becoming not just the most valuable but also the best-run companies in their sectors. The combination of high governance and a focused path towards sustainability must serve as the fundamental substrate for the ecosystem this decade.

The top 25% of Indian funds are showing superior returns as they enter their exit periods, demonstrating that the Indian innovation ecosystem is growing similar to China at the start of the last decade. Further proof of strong growth potential comes from the growing trend of multiple pension and sovereign funds from Canada, the UK, Singapore, the MEA, and the US investing heavily in the Indian ecosystem.  

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India’s Public Markets are Welcoming Startup IPOs

The Indian public markets have demonstrated their sophistication and discernment towards startup IPOs over the last 2.5 years. We expect at least 12-15 VC-backed companies completing their listings and another 15-20 initiating their filing over CY24.

The inbound liquidity of $4 billion monthly from SIPs, pension programs, and institutional allocations has provided a reliable substrate of support for the Indian markets. Even though net FII was outward, Indian markets have had some of their best quarters yet. The markets have accepted an IPO every 22 days, and the indices remain hungry for great Indian companies bringing new dimensions of the economy into the public markets.

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IPO-bound Startups Will be Rewarded for Demonstrating High Quality and Credible Growth

While profitability has become the fallback for every startup in 2023, the data from the public markets is clear. India rewards growth companies enormously and is hungry for great growth ideas. The magic formula is consistently compounding revenue growth (40-60%) with reasonable EBITDA expansion. Public market investors want to see a 10x story over the next 10-15 years from buying these stocks, and will apply hard tests to scrutinise these businesses. So many Indian startups can present this combination soon, and they should expect a rewarding welcome from the IPO markets if they are priced right.

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India’s Indices Are Set Up for Massive Inflows over 2024

We anticipate heightened interest in India in 2024, with significant inflows into the country's bond and equity indices. Inclusion in the JP Morgan EM Bond Index and the launch of new passive funds tracking Indian Nifty Indices signal a substantial shift. The total AUM of such funds has surged from USD 1 billion in November 2013 to around USD 70 billion in November 2023, presenting a compelling investment landscape. This influx is expected to lower interest rates, and private investors, previously inactive, are set to redeploy from February 2024, creating favorable investment opportunities.

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2024 Will Be A Year To Remember!

Top 25% of Indian funds show superior returns, indicating the growth trajectory similar to China at the start of the last decade. Multiple pension and sovereign funds globally are investing heavily in the Indian ecosystem, signaling sustained demand for market leaders and category creators.

Over 50% of the global economy holds elections this year. With more than 70 elections in countries that are home to around 4.2 billion people, this is the biggest election year in history. So we can also expect significant volatility!

India, the fifth-largest economy, is poised to become the third economy to transcend the $10 trillion GDP ceiling. As we move forward, aligning policy, talent, and capital in areas such as inclusive fintech, logistics, blockchain, semiconductors, and more will prepare the ecosystem to address future needs and opportunities, ensuring inclusive prosperity and sustainable growth for the nation.

We are in the midst of a generational surge in the Indian economy, and 2024 is set up to be an exciting year indeed!