India: already risen and rising

India surpassed the United Kingdom as the world’s fifth-largest economy last year and is likely to surpass China as the most populous in 2023. The subcontinental giant will also host this year’s G20 summit.

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For some, these observations demonstrate India is emerging as an economy of genuine scale. For others, they camouflage the country’s struggle to get the basics right. The reality is more nuanced.

“India eclipsed China’s GDP growth in 2021 and 2022 and is likely to do so again in both 2023 and 2024”

It’s clear India has been rising for some time; its share of world gross domestic product has more than tripled since 1992. That year US GDP was 18 times larger than India’s; today that multiple is only seven.

India eclipsed China’s GDP growth in 2021 and 2022 and is likely to do so again in both 2023 and 2024. In fact, relative demographic trends suggest China’s growth exceeding India’s is likely to be the exception rather than the norm.

Arvind Subramanian and Josh Felman suggest “there is no inevitability…from the decline of China to the rise of India”. That is only partly true.

China is still a very large economy recording reasonable GDP growth, even if slower than in the past. But as the end of China’s economic exceptionalism has become clearer, the search for alternatives has accelerated. That search is clear in the data.

Portfolio capital outflows from China were more than four times larger than from India in 2022. Foreign firms’ net payments for direct investment (FDI) into China fell to the lowest since 2016 while FDI into India remained strong during the pandemic. Last year the value of cross-border merger and acquisition deals declined in almost all APAC countries compared with 2021 – except India, which hit a record.

The broad trends in the World Bank’s Doing Business survey seem obvious, even as the detail is being reviewed. China ranked outside the top 80 until 2017 when its GDP per capita was USD8,800. India ranked within the top 80 in 2018, with a GDP per capita of only USD2,000. In the most recent survey, they are only six places apart.

The pandemic added a sharp decline in birth rates to China’s already stark demographic challenges. The country’s working age population peaked in 2014. In India, the pandemic has done little structural damage. If anything, the reverse has occurred.

The COVID-19 era shifted global working patterns in ways India is uniquely placed to capture - through its scale, technology capacity and English-speaking capability.

The pandemic also exacerbated geopolitical fault lines, leaving India’s non-alignment less cemented. India is in something of a geopolitical sweet spot, courted by the Quad, China and others. After a decade without new trade agreements with any large economy, India signed agreements with the UAE and Australia in 2022. One with the United Kingdom is likely in the first half of 2023.

The COVID period also saw India move on its physical infrastructure, narrowing the gap with what the IMF labelled “world-class public digital infrastructure”. This shift is starkly visible in India’s cities and in the data. For at least a decade, state-government infrastructure spending has never been higher than the 23 per cent of total spending we see today, while central government spending is at a record 19 per cent.

Last week’s Union Government budget doubled down on the capex agenda with plans to increase capex spending by a third to 4 per cent of GDP. In the budget overall, there is also a marked improvement in the quality of spending. The record capex spend will have a high multiplier effect on growth and bolster private investment.

For India, progress on non-performing loans during the pandemic is likely to improve the provision of credit to the economy. Non-performing loans as a share of total bank loans peaked at 11.2 per cent in 2017, a worrying level, but have since declined to 5 per cent with further declines likely.

Hindsight is a wonderful forecaster. China’s performance over the last two decades is now treated as transparently predictable when it was anything but at the time. I recall thumbing through Joe Studwell’s book, The China Dream, in the early 2000s and wondering how seriously to take it. Many expected China to be the world’s largest economy by now yet it’s not clear that will happen anytime soon. Others have spent plenty of time predicting China’s collapse.

There also seems to be implied criticism of India’s development because it is charting its own path. Economic development has no standard recipe. The rise of the ‘Asian Tigers’ (Hong Kong, Singapore, Taiwan and South Korea) was unique. China’s rise has been unique. So too will be India’s. Textbooks were rewritten after both and likely will be again as India’s continues to develop.

No doubt India has an unenviable to-do list. But wouldn’t we expect an economy with a GDP per capita of USD2,500, ranking 185th in the world, to have plenty to do? At this stage of development, the list should be long. Mark Mobius’s classic On Emerging Markets reminds us emerging economies are the epitome of the risk-reward trade off. One doesn’t exist without the other.

The to-dos are what deliver the upside.

Richard Yetsenga is Chief Economist at ANZ Institutional

A version of this article appeared in The Nikkei on 7 February 2023.

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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