India, the elephant in the shadow of the dragon

The nature of global activity is increasingly shifting in India’s direction. While reform in the country has come at the cost of growth in the short term, it has brought structural benefits which will serve it well in the long term. 

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Illustration: Melissa Currie.

More broadly, changes in the global economy are shifting India’s way, even if manufacturing remains a more difficult path to prosperity.

“India has the conditions and policy commitment to make significant progress in this new game of growth."

India’s service sector is well placed as the world shifts towards tradable services, particularly as those services increasingly adopt a digital edge. India’s diaspora (16 million people whose remittances are equal to 3.4 per cent of gross domestic product) create a significant advantage in this regard.

The demographic dividend available from achieving more equal female participation in the labour market remains very meaningful. Women comprise 27 per cent of the workforce in India - only half the global average.

Technological change and China’s enduring industrial dominance suggest the textbook path from farm to factory to office may well be a dynamic relegated to the history books.

For today’s emerging economies, technological progress is no longer an automatic means by which a rural, impoverished population can rapidly attain middle class prosperity.

However, technology has added opportunities for growth in services, boosted the ease with which vast segments of a country’s poorest can begin saving and spending and even created a basis for entirely new industries.

India appears to have the conditions and policy commitment to make significant progress in this new game of growth.

Own terms

India is leveraging demographics and policy to grow in a world very different from when China began to rise. Too often, rather than being considered on its merits, India’s performance is compared with those which went before it.

India’s growth will take place in a world very different from the turn of the millennium when China joined the World Trade Organisation.

Technological progress and China’s success have fundamentally changed the game. In the ‘elephant versus dragon’ race, size (specifically, population size) is one of the few commonalities which make comparison between these two countries reasonable, so great are their differences.

India’s economy is one-fifth of China’s. In both nominal aggregate and per capita GDP terms, India’s economy today is the same size as China’s was a decade ago.

Even assuming 2017 is an outlier and India grows faster than China in the decade ahead, its rise will not be a simple catch-up story with India becoming the next China. Though it will not rise on the same scale as China, India’s size still means the opportunities in this next phase of growth will be significant.

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Chinese manufacturing labour costs nearly four times as much as it does in India and China’s working-age population is projected to drop below India’s in a little over five years.

Despite this the manufacturing-paved path to growth is much more challenging than it used to be. In Asia, South America and Africa, there is evidence manufacturing’s share of employment is peaking before it can deliver either high wages or broad employment.

At the same time, compelling research from the United Nations argues that this ‘average effect’ is accounted for by a narrow group of countries (including China) dominating global manufacturing.

The overall message is the manufacturing-led path to economic development is less open than it used to be.

That does not mean manufacturing cannot grow in India. In fact, Indian manufacturing grew 10.8 per cent in 2015-16 and 7.9 per cent in 2016-17.

This is evidence India’s manufacturing potential should be taken seriously. India’s rise in the latest Global Competitiveness Index is notable. In fact when you compare India and China at similar stages of development, India is outperforming on a number of measures.


Manufacturing will not provide the broad base of economic growth it did in China, primarily because it is becoming less labour intensive globally. Yet it can still grow in India provided progress on labour and infrastructure reform continues.

That matters because manufacturing enhances India’s other strengths and the interplay between these factors is the key to India’s edge. 

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In fact there is a simpler argument to be made. Namely India is operating with such a range of inefficiencies that addressing these over time should naturally bring some growth in the economy.

Consider in recent years, energy price subsidies have been almost entirely abolished, the monetary policy regime has changed fundamentally, large parts of the informal sector have integrated into the mainstream economy, a goods-and-services tax is in place and the banking sector is recognising and dealing with non-performing assets.

All this has cost economic growth, particularly as the banking sector adjusts to much greater transparency about the value of its assets. It implies we can be much more confident about the base on which India’s growth is built, particularly as we consider China’s trajectory over coming years.

India’s service sector continues to outperform China’s service sector and offers large potential for continued economic growth. It contributed 54 per cent to the gross value added in fiscal 2017 and is expected to grow at 8.5 per cent in 2018.

India’s IT sector is expected to reach annual revenue of $US350 billion by 2025 and India’s start-up system continues to expand and indeed to break into new territory.

This increasing economic complexity presents a great opportunity in the form of connecting India’s traditional IT expertise to its newfound gains in manufacturing capabilities.

Noting manufacturing industries near their markets and supply chains tend to create long-term employment, the McKinsey Global Institute says, “with India’s strong domestic IT capabilities, which are increasingly relevant in manufacturing, firms operating in the country can reach customers more effectively, streamline manufacturing processes, and create more efficient supply chains.”


Within India, advances in cities, on gender inclusion and in the digital economy are strengthening the dynamics of production and consumption locally and may be the start of bigger trends; even if the active reform program of the past 18 months has cost growth in the short term.

Homi Kharas at the Brookings Institution estimates in the next decade the world will reach a tipping point where the middle class will be, for the first time ever, the largest income segment.

A majority (88 per cent) of these new billion entrants will live in Asia, leading to big distributional market shifts in favour of both India and China.

Progress in female workforce participation has been made, yet there remains a great deal to be done. In 2016 the World Economic Forum noted regression on women’s estimated earned income, and said India “continues to rank third-lowest in the world on Health and Survival, remaining the world’s least-improved country on this subindex over the past decade.”

Technology and fiscal policy reforms are also boosting consumption opportunities. According to BCG, India’s online consumers grew seven-fold in the last few years (to between 80 and 90 million) delivering $US45 billion to $US50 billion in the decade to 2025.

In the next few years the Indian internet service market is likely to grow, further leveraging this digital ecosystem and the ‘new’ hundred-million consumers who enter the lower middle class segment. Innovative partnerships in this sector are already mushrooming.


India benefits from a youthful population, a heritage of service sector strength, a skilled and wealthy diaspora that is the largest in the world and electronic payment systems rapidly developing to serve its tremendous domestic market.

The relative political stability of India and the strength of the Modi government to continue to make reforms are a source of optimism for the short-to-medium term. The broad agenda of policy initiatives, the push to harness the talents of the diaspora and the efforts to include more women in its workforce and consumer base target the opportunities in the new game of growth and are poised to continue.

Should they succeed the elephant will not become a copycat dragon. Rather, India will have written a growth story on its own distinctly 21st century terms.

Richard Yetsenga is Chief Economist at ANZ

This is an edited version of a piece which appeared on ANZ’s Institutional website.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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