If India hits all the right economic notes it could lead global growth by 2028.
By Dan Strumpf, Anup Roy and Abhishek Gupta, Bloomberg Economics
China is slowing and Western governments increasingly see it as a rival rather than an economic partner. On its southwestern border, another rising economy is vying to take its place as the world’s next growth driver.
India’s stock market is booming, foreign investment is flooding in and governments are lining up to sign new trade deals with the youthful market of 1.4 billion people. Aircraft makers like Boeing Inc. are taking record orders, Apple Inc. is scaling up iPhone production, and suppliers that have long clustered around manufacturing corridors of southern China are following.
For all the optimism, India’s $3.5 trillion economy is still dwarfed by the $17.8 trillion behemoth that is China and economists say it would take a lifetime to catch up. Shoddy roads, patchy education, red tape and a lack of skilled workers are just a few of the many deficiencies western companies run into when setting up shop.
But there’s one important measure where India could overtake its northern neighbor far more quickly: As the engine of global economic growth. Bullish investment banks, such as Barclays, believe that India can become the world’s largest contributor to growth within Prime Minister Narendra Modi’s next term. His party is widely expected to win elections set to begin in weeks.
Exclusive analysis by Bloomberg Economics is even more optimistic, finding that India can reach that milestone by 2028 on a purchasing power parity basis. To get there, Modi will need to hit ambitious goals in four crucial development areas — building better infrastructure, expanding the skills and participation of the workforce, building better cities to house all those workers, and luring more factories to provide them jobs.
What’s the most compelling investment: India, China or Japan? Share your views on Asian markets in this week’s MLIV Pulse survey.
Of course, all forecasting by definition relies on incomplete information. Black swan events or an economic shock can throw any forecast out the window.
In a recent interview, India’s Chief Economic Adviser V. Anantha Nageswaran cautioned against making comparisons with China given the size of its economy is much larger. But he noted that India’s growth potential, its younger population, infrastructure buildout and the potential to expand its middle class to as many as 800 million people represents a clear value proposition for foreign investors.
“That is the biggest draw,” he said. “It’s not just cost competitiveness, it’s also the marketplace, the ability to generate economic returns, the rule of law and the stability of policies with respect to international investors being able to repatriate your money relatively easily.”
In some sectors — such as aviation — there is evidence that India’s lofty growth expectations might just pan out.
Last year, IndiGo, the country’s biggest airline, and Air India Ltd. placed record deals for 970 aircraft with Airbus SE. and Boeing. India’s newest airline, Akasa, also ordered 150 jets from Boeing earlier this year.
Salil Gupte, president of Boeing India, said a combination of new airports, an array of aviation startups and growing demand for domestic travel stemming from a rising middle class are fueling demand for planes.
“You see startup airlines that have grown faster than any other startups in the history of aviation coming up in India over the last year,” he said. “All of those factors drive a significant civil aviation market opportunity.”
The U.S. company in January inaugurated a new engineering center in Bengaluru in southern India that will cost $200 million and be the company’s largest investment outside of the US when complete, coming on top of a pledge to spend $100 million on infrastructure and pilot training over the next two decades to meet the growing demand for pilots.
Infrastructure spending is critical for rapid development because it provides jobs and serves as a growth multiplier by cutting logistics costs, facilitating trade and encouraging businesses to set up shop once transport links have been made.
That’s what’s happening in Noida on the southeastern edge of the capital city New Delhi, where vast blocks of new electronics factories have sprung up, evoking the rapid expansion of the manufacturing districts of Shenzhen in southern China in prior decades.
Dixon Technologies Ltd., an Indian contract manufacturer, has broken ground on a 1 million square-foot mobile-phone assembly plant on a plot of land rimmed by orchards and wide highways in Noida’s south. On a recent visit, more than 200 hard-hatted workers were on site tearing up the earth and laying the foundation for the factory that will begin to churn out smartphones next year.
The company’s workforce has grown from around 9,000 before the pandemic to about 26,000 today, explains Sunil Vachani, the chairman and co-founder. Vachani said Dixon is benefitting from a boom in new business from clients like Chinese smartphone maker Xiaomi Corp. and South Korea’s Samsung Electronics Co. wishing to use its factories to manufacture goods for India’s rising middle class.
“What we’re used to seeing in China is these large mega factories, where thousands of people are working on one campus and live on that campus,” said Vachani. “We are also trying to do that in India.”
Expanding India’s manufacturing capacity is critical to boosting growth. The service sector simply doesn’t create enough jobs and generally recruits from the educated labor pool, whereas the manufacturing sector relies more heavily on large numbers of less skilled workers — a key force that helped power China’s economy and put its massive labor force to work.
“We have this very large, surplus labor in agriculture that cannot tomorrow start writing code,” said Sabyasachi Kar, professor at the Institute of Economic Growth, a Delhi think tank. Manufacturing “is the process through which we have to bring these people out of the agriculture sector and into employment.”
Dixon’s Vachani said he has no problems recruiting workers for his factories from the nearby towns of Uttar Pradesh, the state where Noida is located. With about 200 million people, Uttar Pradesh is India’s most populous state and is known for its large agricultural economy and high unemployment rate.
“If you want to set up a factory employing 50,000 people, you can do that today,” he said. “You can get that manpower within a month, maximum.”
India stands out as the sole country with a population large enough to offset retiring factory workers in advanced economies and China. Bloomberg Economics estimates that some 48.6 million medium skilled workers — typically employed on the factory floor — will retire from China and advanced economies from 2020 to 2040. In the same period, India will add 38.7 million such workers.