27 February 2019

Can India Replace China as an Engine of Economic Growth?

The rise of China from an isolated economy that ranked among the poorest countries in the world to an economic superpower is one of the most influential economic events in world history.  Like groundbreaking economic transformations that have reshaped the global economy such as the Industrial Revolution, the rise of the United States and the Information Revolution, China’s economic rebirth since the 1980s has had an impact on all aspects of the global economy. The most noticeable impact has been on the global manufacturing sector, which has been shaken to its core by the incredible expansion of Chinese manufacturing industries such as the automotive, steel and shipbuilding industries.  In recent years, China’s increasingly important consumer sector has risen to the fore, with China becoming the leading growth market for many sectors of the consumer goods industry.  

For a thirty-year period from the early 1980s to the early 2010s, the Chinese economy grew by an astounding 10% per year, an unprecedented lengthy period of such high growth for a large economy. This growth allowed China to rise from a third-world country to a middle-income economy and to be in a position to overtake the United States as the world’s largest economy in the near-future. Furthermore, this transformed China into the key growth market for most industries.  However, there are clouds on the horizons.  Over the past year, the Chinese economy has been battered by the combination of a trade war with the United States, weakening export markets and internal pressures such as high debt levels and market volatility.  As such, the Chinese economy has slowed significantly in recent months, certainly much more than Beijing will admit.  As a result, more and more businesses and investors are turning to the world’s other giant emerging market, India, for growth in many different sectors of the economy.

For businesses and investors, India provides many reasons for optimism when it comes to future growth opportunities. For one, India is home to nearly as many people as China, and as its rate of population growth far exceeds that of China, India will soon be the country with the world’s largest population. In fact, by the year 2050, India will be home to 1.7 billion people, while China’s population will already be in decline.  Likewise, India has a strong presence in many high tech and fast-growing sectors, a factor that bodes well for growth prospects in India.  Even with a great deal of volatility and disruption in recent years, the Indian economy has managed to grow by an average of 7.4% per year over the past decade, just below the 7.9% average economic growth recorded in China during the past ten years.  In contrast, India remains relatively poor.  Since 2000, China’s per capita GDP (at PPP) has risen from $3,682 to $16,096.  In contrast, India’s per capita GDP (at PPP) has risen from $2,546 to just $6,925, an impressive increase, just not when compared to China’s.  Similarly, India has seen significant increases in exports and foreign investment in recent years, but again, these increases are dwarfed by those that have been recorded in China.

India has many advantages when it comes to attracting business and investment in the years ahead.  First and foremost, its huge population provides many opportunities for growth on the Indian market, particularly as India’s population remains relatively young when compared to other large emerging markets. This gives India a huge market potential for businesses and investors in many different services and industries. Meanwhile, India’s expat community has a major presence in many of the world’s leading economies and industries. For example, the huge number of Indians working in the United States’ Silicon Valley is a testament to the power of India’s expat community and its influence on key economies and industries around the world.  This combination of a gigantic potential market and a large presence in many high-growing sectors of the economy will lead to higher levels of investment in India in the coming years, helping to boost economic growth in the process.

The reason why India has thus far failed to match China’s levels of long-term economic growth and poverty reduction is the fact that businesses and investors have struggled with the many disadvantages that continue to plague the Indian economy.  First, India is simply much poorer than China and this has hindered the development of India’s domestic market.  Second, whereas China was able to kickstart its economic miracle by developing large-scale manufacturing industries that focused on exporting goods to the world’s developed markets, India has thus far failed to expand its manufacturing sectors to the same degree.  There are many reasons for this, including the poor state of India’s infrastructure, the regional differences that have hindered a development of a national manufacturing strategy and an overall lack of natural resources.  In China, the high degree of centralization in decision-making benefitted the Chinese economy in the early days of its economic transformation.  In India, there is no such centralization, with local and state governments often contradicting or ignoring the policies formulated in New Delhi.  As such, India has some areas that have recorded impressive rates of economic growth and poverty reduction in recent years, but it also has some regions that have fallen further behind their more successful rivals.

Despite these many obstacles holding back economic growth in India, the simple fact that India is home to nearly 18% of the world’s population will lead to businesses and investors continuing to view India as a key growth market over the longer-term.  Moreover, as India’s economy continues to expand by 7% to 8% per year in the coming years, its domestic market will continue to grow and become more attractive for a range of businesses and investors, Still, India can do much better and it can learn many lessons from China.  For one, politics must get out of the way, and instead, a national growth policy must be enacted.  However, as India’s upcoming elections will certainly reveal, Indian democracy is a challenge given the huge numbers of political parties and leaders that are involved in the country’s decision-making.  Another area where India needs to improve is its infrastructure, as the development of India’s infrastructure has been hampered by its chaotic politics.  Without huge investments in its infrastructure, India will be unable to develop a manufacturing base such as China’s.  Only if India can improve its decision-making and overhaul its infrastructure will it be able to match the double-digit rates of economic growth that China did from the 1980s to the 2010s.  However, it remains unlikely that India will be able to transform its politics enough to match China’s economic miracle.  Still, in a world of slower economic growth, India’s 7% to 8% economic growth will continue to attract businesses and investors, as India will remain the world’s fastest-growing large economy for the foreseeable future.