India has the ability to be the next powerhouse as its economy has demonstrated resilience despite the challenging times
As India celebrates its 74th Republic Day, an interesting feat seems to be under-acknowledged. In January 2023, India surpassed China to become the world’s most populous country with a population count of approximately 1.417 billion as against China’s 1.412 billion, as estimated by the World Population Review (WPR). This seems to be the most plausible conclusion given the announcement by China’s National Bureau of Statistics on the decline in the country’s total population by 850,000 between the beginning and the end of 2022. This creates both opportunities and challenges for India. While this expands the human capital base, thereby, enhancing the productive capacities across economic sectors, it also adds urgency for effective education and health programmes, skilling initiatives, and job opportunities to ensure the productive use of human capital.
Despite the global turmoil as a result of the dual shocks emerging from COVID and the Ukraine-Russia war, the long-term growth story of the Indian economy remains the only bright spot in the dismal global growth scenario. This has helped attracting foreign investments in the country, with FDI inflow reaching an all-time high in 2021-22 at almost US$ 85 billion. India’s emergence as the world's fifth-largest economy, overtaking the United Kingdom (UK) in 2022 marks the beginning of the “India era” in the global growth story: It is set to surpass Japan and Germany to become the world's third-largest economy by 2029.
There are three factors that have enabled the Indian growth story. Firstly, if the pandemic had had one crucial lesson for the global economy, it must be reducing the overdependence on China-specific Global Value Chains (GVCs). As is evident from the pandemic, the subsequent Ukraine-Russia war or the recent disastrous COVID-19 surge in China—the overdependence on specific economies is bound to have cascading effects on the world economy because of the macroeconomic shocks they produce. Secondly, the contours of economic partnerships have changed. Countries now strive to strike the right balance between globalisation and localisation, through bilateral and multilateral platforms characterised by leveraging sub-regional comparative advantages. To a large extent, these emerging forms of glocalised models are also based on controlling Beijing’s political and economic prowess in the Indo-Pacific and beyond, where India plays an active role. Thirdly, there is no doubt that the pandemic has provided an uptick in the use of technology—ranging from the provision of social security payments at the grassroots to government-level conferences.
While many also hail Vietnam as another economy to be in the race of attracting investments fleeing China, India could be the potential frontrunner in the C+1 game.
The US-China trade war and the pandemic-induced supply chain disruptions emanating from China have indeed paved the way for many western corporates to consider a China Plus One (C+1) strategy that would entail diversifying investments from China to other countries, to mitigate the economic and geopolitical risks associated with the former. While many also hail Vietnam as another economy to be in the race of attracting investments fleeing China, India could be the potential frontrunner in the C+1 game.
There is no doubt that globally, the bright spot in the dismal backdrop is a resurgent Indian economy that has risen from the ashes like a phoenix after a year of negative growth caused by the pandemic-led lockdown.
There are various reasons for India to surge ahead of others and lead the world economy. Firstly, India enjoys a comparative demographic dividend over China. While the under-30 population in India is about 52 percent, the same value stands at around 40 percent for China which is going to shrink faster for the latter in the next 10 years. The young population is expected to boost consumption, savings and investments which are necessary conditions for India’s avowed goals of a 5- or 10- trillion-dollar economy.
Second, the low cost of labour and other forms of capital in the Indian factor markets gives the economy a distinctive advantage in bringing down production costs and hence making commodities more price competitive in the international markets. 2019 estimates show that average Chinese wages per month are almost 10 times more in comparison to Indian wages. By leveraging the scale economies in manufacturing, India has the potential to become a sizeable global player in electronics and semiconductor products as part of the C+1 diversification strategy. In fact, India’s labour cost is also half of that of Vietnam.
Third, the heavy investment in physical infrastructure through whole-of-government exercises such as the National Infrastructure Pipeline (NIP) for FY 2019-25 (estimated total project cost of US$ 1791.05 billion) is anticipated to bring down the costs in the manufacturing sectors. The Indian transport sector is also expected to grow at a CAGR of 5.9 percent and is slated to cut transportation time and costs by approximately 20 percent. Alternatively, in China, it is often the case that the pick-up facilities, over-the-road transport, and final delivery are done by different companies which increases the transaction costs of the entire process.
Fourth, recent policy interventions in encouraging the business climate in India through measures such as—Production Linked Incentive (PLI) scheme, reforms in tax regimes, liberalisation of the Foreign Direct Investment (FDI) policies in manufacturing, setting up of land pools and organising regular business summits have definitely helped India counter China in attracting investments to the domestic economy. All these, driven by the ‘Make in India’ initiative, has also been impelled by the process of promotion of the competitive federalism framework, where the states are continuously bringing about reforms in their practices and are constantly evolving to reduce the transaction costs of doing business on the basis of the Business Reforms Action Plans (BRAP) parameters.
Fifth, riding on the digital uptick provided by the pandemic, India is well-placed to harness its high internet penetration at 43 percent to convert digital skilling initiatives for returns on various economic sectors, especially services. In fact, the right mix of home-grown technologies such as the Aarogya Setu or DigiYatra apps, as well as the wider penetration of Google and Facebook (which are banned in China), give the Indian youth a cut above the rest in terms of access and knowledge of digital facilities.
Sixth, the prevalence of the English language skill set in the young Indian populace undoubtedly puts India ahead of China. As English is the second official language in the Indian states, it provides business executives with ease of communication in conducting business with North American and European clients.
As India assumes the presidency of the G20 and the Shanghai Cooperation Organization this year, it provides the nation with a unique opportunity to traverse the changing contours of globalisation while being one of the strongest voices for the Global South in recent times.
Seventhly, in the post-pandemic world, countries are now cautious to strike the right balance between globalisation and localisation, through bilateral and multilateral platforms. The economic partnerships are often characterised by leveraging sub-regional comparative advantages. To a large extent, these emerging forms of glocalised models are also based on controlling Beijing’s political and economic prowess in the Indo-Pacific and beyond, where India plays an active role. For example, India’s decision to not join the world’s largest trading bloc—the Regional Comprehensive Economic Partnership (RCEP) in 2020 to protect the domestic market and curb trade deficits, sent strong signals of New Delhi’s disassociation with Beijing in the domain of trade partnerships. Whereas, the historic Comprehensive Economic Partnership Agreement (CEPA) that was signed in 2022 between the United Arab Emirates (UAE) and India, is expected to open up access for Indian exporters to the Arab and African markets, and is estimated to increase two-way trade from US$ 60 billion to US$ 100 billion in approximately five years.
Eighthly, Indian diplomacy is indeed playing an extremely important role in responding to dynamism in the contemporary world order. In addition, partnerships such as the QUAD—a strategic grouping comprising Japan, India, US and Australia—and I2U2— grouping of India, Israel, the UAE, and the US, the trade agreements with Australia, Canada, the European Union (EU) and African countries have equipped Indian businesses with greater access to finance, technology, and previously undiscovered markets. As India assumes the presidency of the G20 and the Shanghai Cooperation Organization (SCO) this year, it provides the nation with a unique opportunity to traverse the changing contours of globalisation while being one of the strongest voices for the Global South in recent times.
Finally, one needs to take into account the size of the domestic market in India. One of the advantages with China over the last decade been the massive size of the domestic market with its huge population base and rising per capita incomes. The only alternative to compete with such a market size and with increasing incomes is India, which presents a large market with a huge population of 1.3 billion whose incomes are increasing at 6.9 percent per annum as per recent estimates. Compared to that, Vietnam presents a much smaller market with a population base of 98 million.
Given these, there is no doubt that globally, the bright spot in the dismal backdrop is a resurgent Indian economy that has risen from the ashes like a phoenix after a year of negative growth caused by the pandemic-led lockdown. India’s 74th Republic Day, therefore, should not merely mark a remembrance of the past or a celebration of adoption of the world’s largest and most comprehensive constitution, but should also be a celebration of the dazzling future of a roaring economy that will show light to a dreary world.
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Dr. Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF), India. In that capacity, he heads two centres at the Foundation, namely, the ...
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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