Can India Surpass Germany by 2022?

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After the notebandi induced slowdown in November last year, most domestic and international economists turned wary of India's growth prospects as 86% of the currency under circulation was sucked out of the economy in a flash.

Several rating agencies, including the Reserve Bank of India, lowered the country's growth estimates.

While the country is still recovering from the disruption, most economists remain optimistic about the country's economic growth momentum in the medium-to-long term.

As India remains the fastest-growing economy in the world today despite the global vagaries, the International Monetary Fund (IMF) believes the country will become the world's fourth largest economy in 2022.

The nternational organisation predicts that India will topple Germany from the current fourth position, over the next five years.

However, the road to becoming the fourth largest economy by 2022 may not be smooth for India, cautions IMF.

One of the most worrying aspects which could be an impediment to India's growth is the piling stressed assets in the banking industry.

Most economists are concerned about the health of the country's banking system and its public finances. Both these factors are significant points of concern since most global credit rating agencies already rate Indian debt instruments just above 'junk' status.

According to government data, bad loans, restructured debt and advances to companies that cannot service their debt have risen to 16.6% of total loans. This has prompted banks to address their asset quality and has forced them to focus on recovery of these loans, which has, in turn, left their loan growth in the doldrums.

India's lingering bad loans woes has been a key concern in the wake of rising corporate defaults, with the finance minister Arun Jaitley also admitting the issue needs an urgent remedy to stem the rising NPA problem.

Apart from slowing investment and dismal asset quality, India's labor productivity has been weakening, limiting growth and employment opportunities.

Labor productivity per person employed eased from 10 percent in 2010 to 4.8 percent in 2016 as reforms sputtered. According to the International Labour Organisation, output per worker is projected at US$ 3,962 for India in 2017, a fraction of Germany's US$ 83,385.

However, despite all these challenges the potential for exponential growth still remains. As India persists with its strong reform efforts, and a tax overhaul through the HYPERLINK "https://www.equitymaster.com/diary/free-gst-report.asp" GST will help push the growth rate further.

Overhauls in labour laws, and a restructuring in the country's banking sector along with a robust unified tax regime will help fuel India's growth story.

While India still has a long way to go in terms of economic growth, it would be interesting to see if the IMF's forecasts hold true in the years to come.

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