India is having a moment. Pundits around the world are convinced we will topple China as a global economic superpower. And the geopolitical stars are certainly aligned in our favour. So what could go right/wrong?
Researched by: Nirmal Bhansali & Anannya Parekh
About the lead image: This 17th century painting shows Emperor Jahangir (on the left) and Shah 'Abbas of Persia'. Given our PM’s penchant for hugs, we thought it most appropriate. Yeah it is a Mughal emperor, which makes it funnier still:)
India rising: The numbers
The lost decades: When India opened itself to the world in the 1990s, expectations were sky high. But our successes remained mixed—and overshadowed by China’s great economic might. As the Economist writes:
Since India opened up in 1991, its economy has prompted both euphoria and despair. One minute it is the next China: a rising superpower bursting with enterprising geniuses. The next it is a demographic time-bomb unable to generate hope for its young people; or a Wild West where Vodafone and other naive multinationals are fleeced. Over the past decade India has outgrown most other big countries, yet this has been overshadowed by a sense of disappointment.
That’s until the coronavirus came along. During the pandemic, China seemed to stumble and slow down—while the Indian economy emerged from it relatively unscathed.
The post-pandemic boom: Today, India’s growth story is undeniable. We are now the fifth largest economy in the world—ranking above the UK. Our GDP will be higher than Germany in 2025 and Japan in 2027—becoming the third largest economy in the world. India also has the fastest growing economy in the world—expanding at a rate of 7.8% this year—compared to China’s 6.3% (though some economists disagree). This may just be our moment:
For India to grow at 7% or 8% for years to come would be momentous. It would lift huge numbers of people out of poverty. It would generate a vast new market and manufacturing base for global business, and it would change the global balance of power by creating a bigger counterweight to China in Asia. Fate, inheritance and pragmatic decisions have created a new opportunity in the next decade.
Data point to note: According to Morgan Stanley, India will drive a fifth of the global economy’s expansion this decade. And it will be one of only three nations that can generate more than $400 billion in annual output growth. Others expect India to become a $10 trillion economy by 2035.
So can we indeed be the next ‘China’? Also: what could possibly go wrong?
One: A nation of young people
We simply have more people and they are overwhelmingly young. We became the largest country in the world in April—overtaking China. And that trend will continue to accelerate over the next four decades. By the start of the next century, India’s population will be 2X of China. As one South Asia expert puts it:
We are on the cusp of maybe the most momentous population transition of the last 200 years.The centre of gravity of where the world is, it’s been shifting for a while, but it’s about to be cemented.
Fountain of youth: India’s biggest ace has always been the so-called ‘demographic dividend’. More than 40% of India’s population is under the age of 25—at a time when the wealthier nations of the world are ageing fast. Eight million Indians enter the job market each year—making us likely to become the “factory floor” of the world. China’s demographics are moving rapidly in the opposite direction. About 203 million people are 65 and older this year—up from 87.5 million in 2000. All of which adds up to a labour shortage—and an overburdened middle class:
China faces the “4-2-1 phenomenon”: each single child is responsible for two parents and four grandparents. Even with high savings rates, it seems unlikely that the younger generation will be able (or willing) to afford such a burden. So most elderly Chinese will rely heavily on a public pension system that itself is underfunded. The shift also threatens to end China’s role as the world’s factory. What once appeared to be an endless stream of cheap labour is starting to run dry.
But, but, but: The Indian workforce is hardly inclusive. Around 61.3% of women in China participate in the workforce. India’s numbers are shamefully low—and dropping: “Only one in five Indian women are in the formal work force, among the lowest rates anywhere and one that has actually declined as India has gotten more prosperous.” By one estimate, female labour force participation fell to 9% in 2022—partly due to the pandemic. According to Bloomberg Economics, closing the gap between men and women—58 percentage points—could expand India’s GDP by more than 30% by 2050. Also a problem:
India’s large Muslim minority is also underrepresented. Despite forming 14% of the population, they’re estimated to hold about 7% of public sector jobs. Government critics fear that India’s secular foundation, and the economic potential of some 300 million people among its religious minorities, are being undermined by hardline officials who’ve pushed for India to formally recast itself as a Hindu nation.
Data points to note: India’s employment figures remain troubling. It has added zero net new jobs over the past decade—even as over 100 million more people entered the labour force. Many young people don’t even bother looking for work due to the lack of good opportunities. Not everyone has shared in the riches of this rising India:
Nowhere else is the super wealthy growing faster than in India, drawing comparisons to the heady times of America’s Gilded Age. Since 1995, the wealth gap between the top 1% and bottom 50% has soared about three times more than the equivalent metric for the US.
China’s rising tide did indeed lift all boats—creating a vast middle class—as must India’s.
Two: Hello, digital India
The government’s push to digitise everything may not impress its critics at home, but it has been hailed as India’s great leap forward elsewhere:
As the cost of technology has dropped, India has rolled out a national “tech stack”: a set of state-sponsored digital services that link ordinary Indians with an electronic identity, payments and tax systems, and bank accounts. The rapid adoption of these platforms is forcing a vast, inefficient, informal cash economy into the 21st century. It has turbocharged the world’s third-largest startup scene after America’s and China’s.
Our trusty IT industry has also doubled in size over the past decade. The half a million new engineers we add each year makes us greatly desirable to the West—especially since they can speak English.
But, but, but: All that tech can only take us so far. Global companies are still not lining up to set up factories in India—because we don’t have the required skilled workers. Our manufacturing sector remains small compared to other emerging economies:
Manufacturing generates 14% of Indian GDP, compared with 27% in China. What industry India does have clusters in the relatively prosperous south and west. But it is the poorer northern states that are making more babies. Uttar Pradesh, for instance, is home to 17% of India’s population but has only 9% of its industrial jobs. That mismatch will hamper India’s economic growth.
As Arvind Subramanian and Josh Felton argue in Foreign Affairs:
Despite all the talk about India as the investment destination of choice, overall foreign direct investment has stagnated for the past decade, remaining around two percent of GDP. For every firm that has embraced the India opportunity, many more have had unsuccessful experiences in India, including Google, Walmart, Vodafone, and General Motors… As such, India’s rise as a digital powerhouse, no matter how successful, seems unlikely to generate sufficient economy-wide benefits to effect the broader structural transformation that the country needs.
The government’s erratic policymaking—and tendency to rig the rules in favour of its chosen business houses—doesn’t help either.
Three: Geopolitical glory
The pandemic also marked the escalation of China’s rift with the Western world—even as it besieged India at its borders. And companies realised Beijing could be dangerously unpredictable in its policymaking—shutting down factories at will. And the now positively frigid relations with Washington only increase the risk for a supply chain dependent on China.
The anti-China charm: Whether we admit it or not, our greatest asset is the reigniting of the Cold War—with the US-led allies on one side and Russia+China on the other. India has emerged as a key player in Washington’s global strategy:
As Asia’s other emerging power, India could act as a crucial counterweight to Chinese influence, both in the region and outside it. That’s why Washington has been courting New Delhi with gusto. President Joe Biden has grand plans to cement the U.S. position in the Indo-Pacific, which encompasses South Asia, East Asia, and the western Pacific, through a range of diplomatic, economic, and security initiatives. India could play a determining part in their success or failure.
The middle way: New Delhi, in turn, has leveraged its appointed role to forge a new foreign policy mantra: my [middle] way or the highway. It has rebuffed all attempts to change its stance on Ukraine and Russia. That the G20 summit’s final declaration does not condemn the invasion is a measure of India’s increased clout:
Indian policy makers “have proven much more willing to embrace stronger forms of alignment with the U.S. without the fear that India would become some kind of American lapdog,” Jeff M. Smith, the director of the Asian-studies program at the Heritage Foundation, told me.... “In fact,” he went on, “India has been able to preserve its strategic autonomy even as it has grown ever closer to the U.S.”
The Global South hero: New Delhi has been eager to cultivate a warm relationship with everyone—be it the Arab countries who were added to BRICS or the African Union who joined the G20. India used the latter to emerge from the summit as the champion of the less affluent nations:
In a multipolar world, India’s embrace of a middle path has bolstered its image as a nation “with which everyone is interested in having a good relationship,” said Kenneth Juster, a former US ambassador to India. “India is positioning itself, and using its presidency of the G-20 to do so, as a bridge between east and west, and north and south,” he said.
But, but, but: The US has long proved to be an unreliable ally—which is one reason why India will never abandon Russia. But as the world moves into a new Cold War, maintaining that kind of ‘non-alignment’—cosying up to both Moscow and Washington—may prove increasingly hard.
The bottomline: An India that wants to reign supreme in a ‘multipolar world’ must also embrace its equally multipolar politics at home.
This Bloomberg News deep dive offers the most comprehensive overview of India’s opportunities and challenges. For a more optimistic view, read Harvard Business Review—while this Foreign Affairs (paywall) piece offers a good antidote. The Economist is very good in comparing India’s prospects to that of China. The Atlantic and Asia Nikkei are best in analysing the strengths and weaknesses of India’s relationship with the US. We did a detailed analysis of the G20 summit—and what it represents for India