A digital financial economy and tax reform could boost India to a decade of 10% per year GDP growth

A new report from Morgan Stanley Research finds that two major initiatives—digitizing its predominantly cash-based economy and reforming its archaic tax system—have the potential to amplify India’s expansion, making it one of the world’s fastest-growing large economies over the next 10 years.

“The country was already on a strong trajectory, but digitization puts India’s nominal GDP growth on track to compound annually by more than 10% in U.S. dollar terms over the coming decade,” says Anil Agarwal, Head of Asian Financial Research at Morgan Stanley. “The result could be a multi-trillion-dollar opportunity.”

India has near term economic problems but visible shifts in economic activity should be seen in 2018. Morgan Stanley believes India’s economy is poised to leapfrog from its current seventh-place position to the third-largest economy by 2027 with $6 trillion gross domestic product. Its equity market, now tenth in the world, could jump to fifth, with financial services and consumer discretionary stocks leading the way.

If India succeeds, it will become the template for other emerging nations. In fact, there may be lessons for developed countries too.

Biometrics and Bank Accounts

The beginning of India’s digital revolution was the 2010 launch of a biometric identification program called Aadhaar, which assigns everyone a unique 12-digit number that can be verified by fingerprint or iris scan. The project is nearly complete, with most of India’s 1.3 billion people now registered in the government’s digital database.

Mobile and Ecommerce boom

Currently, India has around 800 million unique mobile users, and about 430 million have Internet access—a third of India’s population. “We believe Internet access will double in the next 10 years and we estimate that 915 million Indians will be on the Internet by 2026,” says Ridham Desai, Head of India Research.

Goods and services tax will fix fiscal issues

The new Goods and Services Tax (GST) that launched in July also has the potential to improve India’s overall outlook. India’s ratio of tax revenues to GDP is lower than the average for emerging markets, which is a key reason why its fiscal deficit has been relatively high. High fiscal deficits are often a red flag for foreign investors.

Specifically, India is moving from an archaic and complicated tax system to a unified and completely digital system.

Morgan Stanley is bullish on the India stock markets and sees 24% annual returns for the next five years.