Enter the tiger, exit the dragon; will India become the next China?

Will India become the next economy of strong growth? Thoughts as published in Forbes.

According to Angus Maddison, the esteemed economist, the title of the world’s richest country was held between India and China from 1 AD till 1700 AD. Both fell off the podium during the 18th Century as the West developed colonial tendencies. They continued to meander away until the end of the 20th Century when the Dragon roared out of its slumber and the Elephant lumbered just a little faster.

China has since become Asia’s powerhouse, currently holding the baton of growth that has been passed on from Britain to the US to Japan and now China. It has pulled ahead as a result of its savvy government, investment in infrastructure and focus on industries that were both economic and employment multipliers. China was fast to develop Special Economic Zones with a focus on manufacturing and export orientated industries. In short, it made business easy to do, while focusing on multipliers with the added attraction of a huge domestic market to sell into.

On the other hand, while India has succeeded on several fronts such as its IT/BPO industry, which surprisingly generates almost as much as Saudi Arabia’s crude oil exports, its successes have been despite the unease of doing business. India is infamous for its red tape, confusing bureaucratic and socialist ways and a strange habit of putting foreign investors to the sword such as Vodafone and POSCO. However, there is hope that India’s golden decade is about to come.

China’s economy is now the world’s second largest economy having grown at a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” This growth has allowed China to double its GDP every eight years and has lifted 800 million people out of poverty. Its GDP per capita is roughly USD 10,000 having grown from USD 1,000 in 2000. In fact in 1990, both countries were broadly on par at USD 300. This is clearly no slouch.

However, as economies grow, their successes can slow them down. In this case higher wages have begun to make China less competitive and it needs to upscale its industrial mix. It is also required to think of other aspects beyond wealth creation such as the environment and green belting industrial zones. This means taking production permanently offline. Thus, China itself is relinquishing its leadership in certain areas as its economy evolves. This has allowed other developing countries to gain market share. Some of the sectors that have migrated are apparel and Specialty Chemicals.

There is also a growing need for companies to diversify their supply chain beyond China to ensure seamless production.

One reason has been witnessed by the disruption caused by the coronavirus where 3,000 force majeures were declared by Chinese companies earlier in 2020. Even China, which has over 50% of global steel production capacity, needed to import due to the logistical issues.

Another reason to diversify has been the ongoing Trade Wars between the US and China. As one of the cornerstones of his 2016 campaign, President Trump has looked to level the playing field between the two countries as well as limit China’s hold on the world’s supply chains. While it is still early, it doesn’t look like Biden will open the doors quite so easily.

Lastly, with the virus allegedly originating in Wuhan, there is a growing anti-China sentiment whether for right or for wrong. Though this might be more of a knee jerk reaction and good for headlines, it seems unlikely a corporation will change its long-term relationships based on emotion. But for those that are on the fence, it might prove the tipping point.

So how does this mean that this is India’s Golden Decade? Well sitting in the beginning of 2021 with the hope that science prevails, the wind is in India’s favour. For one, for those looking to relocate world factories of scale, a key requirement would be strong local demand to off load production quickly. With a population of 1.3 billion people and an aspirational middle class of around 300 million, India has that potential. English speaking, youthful, educated this might well be the age of its baby boomers. India is already showing global leadership capability in several industries such as the Specialty Chemicals, segments of packaging and two wheelers amongst others.

Also, there is growing buying power. The current nominal GDP per capita is USD 2,199, this is expected to increase to USD 5,625 by 2030. If we broadly assume that 75% is non-discretionary, then discretionary spend is predicted to increase by around 500%. That is huge and it all adds to the consumption story.

Other favorable macros are the fall in oil prices. India imports 220 million tons of oil, 80% of its needs. This give or take is a USD 100 billion bill which has being capped by the rise of shale and renewables. Other macros such as interest rates and inflation have also been kept under control.

So who else is excited by India’s prospects? It would appear the world as demonstrated by the frenzy of investors jumping on the Reliance Jio party. From Facebook to ADIA to KKR, 11 and counting of the world’s mega names have all joined in with Mukesh Ambani’s digitization ambitions. Engaging in a brutal price war that has left only two and a half private players standing, he has emerged as the number one telecoms provider and in two years has taken India from 155th in the world to number 1 in data consumption. Even this digitization push will aide the countries advancement through commerce, education, entertainment and the easing of business.

Where does the government come into this? While it has taken hard decisions such as demonetization and uniformity of taxes, these have been deflationary in nature. And despite winning the majority in the last elections, the government has yet to come up with any transformational policies. It somehow wishes for capitalistic growth with a socialist mind set. If lifting its people from poverty was truly its intention, it would do well to take a leaf out of China’s own playbook by improving the ease of business and taking advantage of the shifting tides.

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