Morgan Stanley forecasts India’s GDP to hit $10.6 trillion by 2035, powered by state-led growth, federal reforms, and infrastructure investment.
India is poised to overtake Germany and Japan to become the world’s third-largest economy by 2028, according to a new report from Morgan Stanley, released on Wednesday. The report projects India’s gross domestic product (GDP) will more than double to $10.6 trillion by 2035, driven by state-level reforms, a surge in capital expenditure, and a maturing consumption economy.
The report, titled India’s State-Led Economic Transformation, outlines a compelling case for India’s upward trajectory, arguing that “competitive federalism” — where states shape their own industrial strategies and compete for investments — is a key engine of national growth. It estimates that three to five Indian states could individually cross the $1 trillion GDP threshold by 2035, placing them among the world’s top 20 economies if treated as standalone entities.
Citing the most recent data, Morgan Stanley identified Maharashtra, Gujarat, and Telangana as India’s current top-performing states in terms of economic size, while Uttar Pradesh, Madhya Pradesh, and Chhattisgarh showed the most dramatic improvements in rankings over the last five years. The firm emphasised that state-led competition in infrastructure, policy reform, and investment attraction would play a decisive role in India’s macroeconomic ascent.
How Is This Possible?
For a country of India’s size and complexity, such a rapid ascent is not simply the result of demographic advantage or global realignment — though those help. Morgan Stanley attributes this acceleration to a decade-long structural shift, anchored in increased capital expenditure, infrastructure modernisation, and policy reforms.
India’s central government has doubled its capital expenditure from 1.6% of GDP in FY2015 to 3.2% in FY2025, according to figures cited by Morgan Stanley and confirmed by the Union Budget documents. This sharp rise has funded massive improvements across transport and urban mobility:
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Highway networks have expanded by 60%
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The number of airports has doubled
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Metro rail systems have grown fourfold
These developments have lowered logistics costs, boosted regional connectivity, and improved the ease of doing business — outcomes that directly impact both domestic investment and foreign direct investment (FDI) inflows.
Global Growth Engine
India is also expected to contribute 20% of total global growth over the next decade, positioning itself as a crucial revenue driver for multinational companies, Morgan Stanley economists said. With global demand for diversification of supply chains, India’s potential as a manufacturing alternative to China has only grown more compelling. Its participation in global production networks, bolstered by initiatives like PLI (Production Linked Incentive) schemes, is beginning to reflect in export figures and industrial capacity.
The report also underscores the rise of India’s capital markets, which have attracted consistent foreign inflows and demonstrated robust performance amid global volatility. According to Bloomberg data, India’s benchmark indices have outpaced most emerging markets over the past three years, buoyed by strong domestic consumption, resilient earnings, and government-led infrastructure spending.
The State Story
The real surprise in the Morgan Stanley report is its state-level focus, highlighting how the future of the Indian economy will increasingly depend on sub-national governance. The researchers argue that states with agile policy-making, better urbanisation, and industrial planning are already seeing disproportionate growth and are set to be the country’s next economic powerhouses.
Maharashtra, Tamil Nadu, Gujarat, Karnataka, and Uttar Pradesh are expected to dominate in the coming decade, with industrial diversification, skilled labour pools, and political continuity cited as strengths. These states will be central to India’s ambitions of doubling per capita income within seven years and achieving broad-based prosperity.
Challenges Ahead
While the trajectory appears promising, Morgan Stanley does not discount the risks. India will need to navigate geopolitical uncertainties, climate vulnerabilities, and job creation mismatches even as it chases high growth. Sustaining capital inflows, managing inequality between states, and executing large-scale urbanisation without major disruptions are also critical hurdles.
Nevertheless, the tone of the report is largely optimistic. It concludes that if India continues on its current path of state-led reforms, infrastructure expansion, and manufacturing competitiveness, it could not only become the third-largest economy by 2028 but also one of the most dynamic investment destinations in the world over the next decade.
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