India: the new factory of the world? How the fifth economy of the planet is challenging China

IA “FACT” already wrote that China found itself in a situation of trade war with many countries of the world. Not only large states, but also small countries are ready to impose customs restrictions on Chinese goods. A special challenge for China will be the transfer of electronics production, in particular Apple products, from its territory to India, which already produces every seventh smartphone in the world.

In this regard, it seems relevant to learn more about the current economic situation in India and the attractiveness of private and corporate investment in this new powerhouse, which is currently the fifth largest economy on the planet. We invited private investor Mykola Melnychuk to comment on these issues.

It will surely impress any potential investor that India’s GDP has doubled over the past 10 years. This is the result of industrialization and the fact that India, as a production site, is a cheap alternative to China, which, with its aggressive economic policy, provokes the search for its replacement. It is driven by geopolitical ambitions, which are absent in India. China’s past economic success has led to an increase in wages and the cost of production in the PRC, which is not observed in other Asian countries: India, Indonesia, Bangladesh, Vietnam, which are gradually dragging production to themselves.

Some global brands return their production to the country of origin, but this is not always economically beneficial, since in developed countries the salary is higher, therefore, the cost of production is also higher. And in India, for the most part, productions involving manual labor, which are difficult to automate and which do not require high qualifications, are located.

If we take the internal potential of India, then it is the world leader in demography, whose population has already reached 1.4 billion people, which has exceeded the total population of the People’s Republic of China. The vast majority of Hindus are young people, the working population, which most actively develops the economy. And India is the second English-speaking community in the world. 125 million English-speaking residents live here. Thanks to this, India can offer English language services.

The specific weight – half of Hindustan’s GDP – is the service sector. It is widely known that there is a strong market for outsourcing services – call centers and customer support centers. In addition, Hindus perform more skilled work, building employment in the field of design, engineering, accounting, jurisprudence, and programming.

The salary of an Indian programmer is significantly lower than the income of his European, American and even Chinese colleagues. At the same time, it significantly exceeds the monetary reward received by his compatriot employed in an agricultural enterprise. The reverse side is the outflow of highly qualified specialists to developed countries with higher salaries.

Another trend is the outflow of unqualified personnel who work abroad for modest remuneration, which, however, exceeds the salary they could claim in their homeland. Of course, remittances sent from abroad to families fuel the domestic economy. But at the same time, Bharat is losing its own workers who could be recruited to build its own infrastructure.

A paradoxical situation arises, when the country with the largest population in the world, a large proportion of young people in the population structure can provide the market with 30% less labor than the same China. It is worth clarifying that the labor force refers to people who are already working or unemployed who are looking for work. Among all Asian countries, India has the lowest rate of official employment.

Even more important is the concept of “participation in the labor force.” This is the ratio of the labor force to the total population. And here there is a problem: a large part of the population does not work, in particular, many women. And the matter is not their desire or unwillingness to work, but their backwardness and poverty, which do not leave women with the resources of time and energy to earn money. According to IMF calculations, the employment of the female part of the Indian population would contribute to the growth of GDP by 27%.

It is worth noting that the common fertile land is able to feed the entire population and make Bharat relatively import-independent. However, this is not enough for the development of the country. The state should develop infrastructure, build bridges, ports, schools. This is where you can find the answer to why India lags far behind China in terms of GDP per capita. China has a much better developed infrastructure to support its production.

And in India, there are big problems even with basic issues of infrastructure, roads, electricity generation, availability of drinking water. And all this in the complex inhibits economic growth.

Some macroeconomic indicators of China’s future successor

For a long time – until 2007 – there was a constant growth of fixed capital in India, and after that – and until now – a reverse downward trend began. It was caused by policy uncertainty, a financing problem, weak private investment, a slowdown in the banking sector and a drop in foreign direct investment.

Since 2008, the value of GDP decreased from 3.6% to 1.5%. And the growth of foreign investments is vital for the growth of the domestic economy. Accordingly, the government should conduct such policies and implement such initiatives – introduce tax benefits, optimize business opportunities – that will make the country’s enterprises attractive for investment.

As for the banking sector in India, it is slowing down due to the strong regulation of the financial market. The largest banks belong to the state, that is, they are highly bureaucratized. Financial institutions lend business very slowly and to a limited extent, which prevents it from actively developing.  The situation is similar with consumer lending, and without receiving loan funds, the population cannot increase the consumption of commodity services.

Bureaucracy and regulation, in turn, contribute to the development of the shadow market, which 2 years ago accounted for more than half of the entire Indian economy. Unofficially employed Hindus are socially vulnerable, and the state, for its part, does not receive taxes. However, in recent years, the government has already achieved good results in bringing the economy out of the shadows.

At the same time, the government cannot stabilize the budget, which, as before, remains unprofitable, which makes the financing of construction and infrastructure facilities problematic, affects the country’s credit rating and the cost of borrowing. If the budget deficit continues to increase, it will inevitably lead to inflation and increase the government’s dependence on external borrowing.

Thus, the following arguments are in favor of investing in the Indian economy: fast-growing economy, large market, improvement of investment climate and diversity of economic sectors. However, there are also some restrictions, such as a ban on foreign direct investment in certain sectors, such as railways and nuclear power.

Tatyana Morarash