How India Can Win China's Growth Crown

The Indian economy is booming this year, with the country's GDP expected to grow between 6 and 7%. India is currently the world's fastest-growing major economy. It is projected to grow from around $3.5 trillion in 2023 to about $7 trillion by the end of the decade. Although the US and China still surpass India in terms of total gross domestic product, powered by a population of 1.4 billion, India has the potential to lead global economic growth.

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Many of the world’s leading investment banks, such as Morgan Stanley, Goldman Sachs, and Barclays, are focusing on India as a prime investment destination. With so much investment flowing in, companies around the world may soon need to develop an India strategy. However, there are hurdles that India must overcome to capitalize on this momentum.

China currently holds the title as the primary driver of global economic growth, largely due to its economic opening in the late 1970s, which accelerated after joining the World Trade Organization in 2001. As China became a magnet for foreign investment, companies worldwide crafted strategies to engage with the Chinese market. In contrast, India began liberalizing its economy in the 1990s, and although its growth has been slower, it now grows at about 7% annually, positioning it to potentially surpass China.

India's per capita income has grown sevenfold from the early 1990s to the present, with significant progress also made in financial markets. In 2023, China contributed close to a third of global economic growth, while India was in second place. However, if India were to increase its growth rate by just 1% annually, it could overtake China by 2028.

Geopolitics and China's internal challenges are also shifting trends in India’s favor. Global investors are moving funds out of China and directing them towards India. A clear example of this trend is Samsung’s Noida factory near New Delhi, now the world's largest mobile phone manufacturing site, which produces 120 million handsets annually. As China's business environment becomes more challenging, companies such as Apple and Boeing are looking at India as a new growth engine.

However, for India to maintain this trajectory, it must address challenges in manufacturing, urbanization, workforce, and infrastructure.

Manufacturing

For decades, China has dominated global manufacturing, with the sector accounting for 26% of its economy. In India, manufacturing makes up only 16% of the economy. To boost this, the government aims to increase manufacturing's share to 25% by 2025. A key part of this effort involves transitioning approximately 150 million Indians currently employed in agriculture into factory jobs.

Urbanization

Urbanization is crucial for this transition. While 64% of China’s population lives in urban areas, India’s figure is only 36%. Expanding urban centers and improving infrastructure, such as railways and airports, are essential to support this shift. However, issues such as water shortages, traffic congestion, and housing challenges must be addressed.

Workforce

India surpassed China in 2023 as the world’s most populous nation, with more than half of its population under the age of 30. This young workforce provides a significant demographic advantage, but the country must create enough jobs to harness this potential. Unemployment remains high at around 7%, with many college graduates considered unemployable due to the low quality of education. Additionally, only 29% of Indian women participate in the workforce, compared to 45% in China. Closing this gender gap could expand India’s GDP by nearly a third by 2050.

Infrastructure

India’s infrastructure needs substantial development. While India’s railway network was larger than China’s in the 1990s, China has since rapidly expanded its network, leaving India behind. Although India has made progress, with its national highway network expanding by more than 50% since 2014, more investment in roads, ports, and railroads is needed to sustain economic growth.

If India can address these challenges, foreign direct investment is likely to increase, further driving economic growth. However, improving the ease of doing business remains a significant hurdle, as bureaucracy continues to make it difficult to start and operate businesses.

Despite these challenges, many remain optimistic about India’s future. With its youthful workforce and increasing global investments, India could soon overtake China as the world’s primary driver of economic growth. One factor working in India’s favor is its position as a viable alternative to China. The Modi government recognizes that countries such as the US are seeking a reliable partner in the region that isn’t China, especially as China becomes more assertive and closed off to foreign companies and investors.