India is poised to become the third largest economy by the end of this decade, even by conservative forecasts.
Our recently published report on India’s growth prospects concludes that its economy can easily grow above 6 per cent annually, culminating in nominal gross domestic product (GDP) higher than US$7 trillion by 2030.
A determined pursuit of wide-ranging reforms could ramp-up real GDP growth to 8 per cent. This contrasts with China’s projected growth slowdown to below 3.5 per cent by 2030.
There are three emerging themes underpinning India’s growth.
The first is India’s public capital expenditure is rising strongly, the second is India is expanding its manufacturing and exports and the third is that India replaced China this year as the most populous country.
The average population age is 28.4 years, which is nearly 10 years younger than China’s.
All these factors will be reflected in rapidly rising per capita incomes, which will stoke demand for goods, services and infrastructure.
As India’s economy picks up pace, its commodity demand will naturally follow.
We estimate that, even in a moderate growth scenario, India’s annual demand for major commodities (oil, coal, gas, copper, aluminium and steel) could grow by more than 5 per cent till 2030. This contrasts with expectations that growth in China’s demand for these items will slow to 1–3 per cent.
But to be fair, India’s commodity demand will grow rapidly from a relatively lower base.
India’s emerging economic growth drivers – manufacturing, exports and capex – are reminiscent of China’s growth take-off that occurred around the turn of the century.
However, the scale and performance of these drivers for India are unlikely to match China’s for several reasons
Unlike China, India does not have a clear opportunity to become a global manufacturing leader for a wide variety of goods.
In fact, India has a ‘late-mover disadvantage’ in key trade segments like electronics, which policymakers are battling through subsidies and other incentives.
India is competing with other Asian economies, such as Vietnam, for a share of exports that China stands to lose because of supply chain relocation.
India’s economy is still service-dominated and will likely remain so for longer, unlike China where the industrial sector was the big driver of growth.
Meanwhile, China’s status as a behemoth in commodity markets is difficult to challenge. It consumes more than 50 per cent of global industrial metals and steel production, while India’s share is merely 2–6 per cent.
India, in short, has a lot of catching up to do over the coming decades, while China will continue to dominate the commodity market in the foreseeable future.
But even if India cannot become a trend-setter, it can become a significant influencer.
A key takeaway from our forecasts of India’s commodity demands to 2030 are that it will find it hard to quickly replace fossil fuels in its energy mix while trying to meet the energy needs of a rapidly growing economy.
Oil’s share in the mix may still rise by 2030, while that of coal may not fall to a desirable level from the standpoint of energy transition.
Natural gas is India’s big bet in curtailing carbon emissions and supporting the transition to low-carbon fuels. Metals and bulks may see a strong rise in demand as infrastructure build-up, rising urbanisation and per capita income provide ample support.