India's economic prowess soars as China faces setbacks
India's economic resurgence gains momentum as China faces a real estate crisis and sluggish growth International investors turn to India, the rising star, as a potential successor in the global growth landscape
India's economy is often compared to an elephant - slow to start but powerful once it gains momentum, according to analysts. Despite the numerous crises in the global economy recently, India has transitioned from a slow pace to a consistent and determined stride.
The year kicked off with a remarkable display of Indian influence at the World Economic Forum in Switzerland. Indian representatives were so prominent on the main street in Davos that it was nicknamed "Little India" by one investor.
Just a few months later, during the inaugural G20 leaders summit in New Delhi, Prime Minister Narendra Modi, India experienced a skyrocketing stock market, reaching unprecedented levels.
India's economic confidence is not confined to Earth alone. In August, the country achieved a significant milestone by successfully landing a spacecraft on the moon, highlighting its scientific and technological aspirations.
This wave of optimism surrounding India arrives at a moment when China, which has been the driving force behind global economic growth for many years, is experiencing a significant slowdown. Consequently, India, its neighboring country to the south, is rapidly emerging as a potential successor. With a burgeoning young population and thriving industries, the nation possesses numerous advantages in its favor.
"The Indian economy is undoubtedly on the path to success, with numerous reforms implemented in recent years clearing the path for substantial growth," stated Eswar Prasad, a trade policy professor at Cornell University. He further added that "foreign investors are increasingly drawn to the country for valid reasons."
Furthermore, New Delhi enjoys improved relations with Western countries, who are growing wary of China. Consequently, investors now perceive the world's largest democracy as a promising prospect amidst an increasingly divided world.
This time is different
In the past few decades, there have been other periods of global bullishness about India, but the excitement kept fizzling out, while China raced ahead.
The disparity in the economies of the two Asian countries is immense. Presently, India's economy stands at a value of approximately $3.5 trillion, ranking it as the fifth largest in the world. Comparatively, China's economy, the second largest globally, surpasses it by nearly $15 trillion.
According to the International Monetary Fund, this year the combined contribution of these two nations is projected to account for nearly half of global growth, with China alone contributing 35% of that.
According to analysts at Barclays, for India to surpass China as the largest contributor to global growth in the next five years, it will need to achieve a consistent growth rate of 8%. The International Monetary Fund (IMF) predicts that India will grow at a rate of 6.3% this year.
In contrast, China has set its official growth target at approximately 5% as it faces various challenges, including sluggish consumer spending and an intensifying property crisis.
"Barclays stated that India's economy is well-positioned for a minimum annual growth rate of 6% in the upcoming years. However, in order to reach the ambitious historical target of 8% growth, it is essential for the private sector in India to enhance its investment levels."
A view of ongoing road construction at Sewri in Mumbai
Bhushan Koyande/Hindustan Times/Getty Images
The Modi government is actively working towards its goal of making India a $5 trillion economy by 2025. It is taking measures to create a favorable business environment and attract more companies to invest in the country.
Drawing inspiration from China's successful infrastructure development from over three decades ago, India has initiated a large-scale transformation of its infrastructure. Billions of dollars are being invested in the construction of roads, ports, airports, and railways. The recent budget allocated $120 billion specifically for capital spending to further stimulate economic growth.
The impact of the efforts is evident in the ongoing rapid construction projects taking place throughout the country. Over the period of 2014 to 2022, India successfully expanded its national highway network by an impressive 50,000 km (approximately 31,000 miles), marking a remarkable 50% increase in its overall length.
Under the leadership of the Modi government, the rate of national highway construction has surpassed expectations, with a daily pace that has more than doubled since it assumed power almost a decade ago.
Digital bonanza
India, which has some of the worlds biggest software companies, has also built a range of digital platformsknown as digital public infrastructurethat have transformed commerce.
"Digitization has revolutionized the lives of both the people and businesses in the country," stated Prasad. "By formalizing the economy, it has eliminated various obstacles to conducting business and instilled a sense of ownership among the citizens, contributing to India's economic achievements."
The Aadhaar program presents a prime example, as it has profoundly impacted millions of Indians by granting them official identification for the very first time. With its status as the world's largest biometric database, encompassing the majority of India's 1.4 billion population, it has effectively aided the government in combating corruption in welfare programs and saved millions of dollars in the process.
Another revolutionary platform, known as the Unified Payments Interface (UPI), revolutionizes the way users make instant payments by simply scanning a QR code. Remarkably, this incredible innovation has gained widespread acceptance across all sections of Indian society, ranging from coffee shop owners to even beggars. Consequently, it has facilitated the injection of millions of dollars into the official economy.
Prime Minister Modi addresses the G20 Leaders' Summit at the Bharat Mandapam in New Delhi on September 9, 2023.
Ludovic Marin/AFP/Getty Images
India's digital public infrastructure has enabled it to achieve financial inclusion targets in just 6 years, a feat that would have otherwise taken at least 47 years, according to Modi who referred to a World Bank report in September.
Indian companies, including major conglomerates such as Reliance Industries led by Mukesh Ambani and Gautam Adani's eponymous group, are investing billions in 5G technology and clean energy, despite their historical reliance on traditional industries like fossil fuels.
Is it enough?
Amidst the ongoing reassessment of supply chains by corporations, India is making decisive efforts to exploit this opportunity. Global companies are keen to minimize their dependence on China, as they encountered challenges during the pandemic and are exposed to escalating tensions between Beijing and Washington.
India, the third largest economy in Asia, has implemented a production-linked incentive program with an investment of $26 billion. This initiative aims to entice companies from various sectors, such as electronics, automobiles, pharmaceuticals, and medical devices, to establish their manufacturing units in the country. Consequently, renowned multinational corporations like Foxconn, a key supplier for Apple, are expanding their presence in India on a large scale.
However, despite India's growing prominence, it has yet to replicate the economic success that China experienced in the late 1990s and early 2000s.
According to Willy Shih, a professor at Harvard Business School, India does not share the same swift government efforts in removing barriers to foreign direct investment (FDI) that China did in that era.
I believe that the perception has changed since China in the early 2000s. It has become more bureaucratic and there is greater unpredictability concerning non-tariff barriers and hindrances.
This unpredictability was clearly evident in 2016 when Modi abruptly imposed a ban on a majority of India's cash, leading to long-term difficulties for both the citizens and businesses. Additionally, despite the country's efforts to attract foreign companies, the authorities have implemented stricter measures against Chinese firms.
According to a report by HSBC in October, economists Frederic Neumann and Justin Feng stated that India currently lacks the capacity to compensate for China's declining growth. They also emphasized the contrasting levels of consumption and investment in the two countries.
China contributes approximately 30% of the global investment, whereas India's contribution is less than 5%. The economists stated that even if China's growth remains stagnant and India's investment spending triples from its recent average, it will still take 18 years for India to catch up to China in terms of investment spending.
The report states that it will take another 15 years for India's consumption to reach the level of China's current total spending. However, it is acknowledged that India will have an impact, but it may not be sufficient to protect the world economy if China's economy experiences a significant decline.
