Is India′s Economy Overhyped?

Perhaps no phrase better captures the changing views of financial markets and the news media regarding the world′s two largest developing economies than the title of a 2023 S&P report: «China slows, India grows»


While China is grappling with an economic slowdown, India appears to be thriving. The Indian stock market is booming, with the number of trading accounts registered with its National Stock Exchange skyrocketing from 41 million in 2019 to 140 million in 2023. Moreover, as Western companies exit China, India is emerging as a leading alternative. With an annual growth of 7-8%, it is widely expected to become the world′s third-largest economy by the end of this decade.

But could India really overtake China and the United States to become the world′s largest economy by the end of this century, as some predict? Or is its economic boom overhyped?

On surface, India holds significant advantages over other major economies. The first is its favorable demographic profile. In April 2023, India officially overtook China as the world′s most populous country. With 43.3% of its population under the age of 25, compared to just 28.5% in China, its workforce is also significantly younger.

Moreover, higher US and EU tariffs on Chinese imports, together with rising labor costs and regulatory pressures within China, will sustain multinational corporations′ shift away from the Chinese market. India, with its vast population and booming economy, is a natural alternative. The significant presence of Indian expatriates in senior roles within major Western firms and international organizations also yields substantial benefits for the Indian economy.

The Indian economy also stands to benefit from the government′s ambitious economic-reform agenda. Over the past few years, Prime Minister Narendra Modi′s administration has introduced various reforms aimed at improving the country′s investment climate. The business sector has enthusiastically embraced initiatives like «Make in India», «Self-Reliant India», and «Digital India». And with Indian wages roughly one-third of those prevailing in China and less than one-fourteenth of US wages, there is significant scope for rapid catch-up growth.

Nevertheless, there are compelling reasons to believe that India′s economic potential has been overstated. For starters, India′s demographic advantage over China is not as significant as it seems. According to the United Nations′ population statistics, the Indian fertility rate, at two births per woman, has already fallen below the replacement level of 2.1. Importantly, India′s female labor force participation rate stood at 32.7% in 2023, far below China′s 60.5%. As a result, India′s total labor force participation rate was just 55.3%, compared to China′s 66.4%.

Likewise, although Indian wages are significantly lower than in China, India′s workforce is also less educated and skilled. According to the World Bank, 97% of Chinese adults aged 15 and older were literate as of 2020, whereas India′s literacy rate was 76% in 2022. This means that the gap in quality-adjusted labor costs between the two countries is much smaller. Moreover, given China′s more developed roads, ports, and infrastructure, manufacturing and exporting goods from India is often less cost-effective than doing so from China.

While India is certainly benefiting from the escalating rivalry between the US and China, this geopolitical advantage is offset by its protectionist policies. According to the World Trade Organization′s World Tariff Profiles 2022, barriers to trade are noticeably higher in India than in China. According to the FDI Regulatory Restrictiveness Index compiled by the OECD, barriers to foreign direct investment are also more severe in India. For these reasons, many of the Western firms exiting the Chinese market may favor more investor-friendly countries such as Vietnam and Bangladesh.

Crucially, corruption levels are persistently higher in India than in China. Transparency International′s Corruption Perceptions Index produces an annual ranking of national probity, for which a bigger number means more serious corruption, based on a combination of surveys of firms and experts. In 2023, India ranked 93rd (out of 180 countries), whereas China ranked 76th.

The UK government′s guidance for overseas business risk in India states: «TI′s Global Corruption Barometer Asia found that India has the highest bribery rate in Asia (39%) and the highest number of people who had to use personal connections to access public services (46%). Although reporting corruption is essential to curb the spread, a majority of those surveyed (63%) feared retaliation if they reported corruption. A large number of people (89%) felt government corruption was a big problem». Given that corruption significantly affects the overall cost of doing business, the Indian government would need to take more decisive action to make the country more attractive to foreign investors.

Overcoming these challenges requires a multifaceted approach. Implementing sweeping anti-corruption reforms is a crucial first step. Over the medium and long term, India must invest in better infrastructure, raise education standards, and empower women to participate in the labor force.

Achieving all this will not be easy. But without progress in these areas, India will not be able to live up to the hype and become the world’s next economic superpower.

© Project Syndicate 1995-2024

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