With China’s prestige as the “workshop of the world” clouded by emerging political risks, slowing expansion, and unsustainable “zero COVID” policies, no country is more poised to gain advantages than India. In May, The Economist published a canopy tale about India, asking if it was the country’s time, and concluded that yes, it probably was. More recently, Stanford economist and Nobel laureate Michael Spence said that “India is the most productive player today,” noting that the country “remains the investment of choice. “destiny. ” And in November, Chetan Ahya, Morgan Stanley’s leading Asia economist, predicted that India’s economy will account for one-fifth of global expansion over the next decade.
To be sure, India can be on the cusp of a historic boom, if it manages to generate personal investment, as well as attract a large number of global corporations from China. But will New Delhi have this opportunity? The answer is not obvious. In 2021, we provided a sobering assessment of India’s clients in external affairs. We pointed out that popular assumptions about a booming economy were inaccurate. In fact, the country’s economic boom had faded after the 2008 global currency crisis and came to an absolute halt after 2018. And we argue that the explanation for this slowdown lies deeply in India’s economic framework: its emphasis on self-sufficiency and the shortcomings of its policy-making process: “software bugs,” as we call them.
A year later, despite the exuberance of the press, India’s economic environment remains largely unchanged. As a result, we continue to say that radical political adjustments are needed before India can revive domestic investment, let alone convince large numbers of global corporations. to move production there. A vital lesson for politicians is that there is no fatality, there is no direct line of causality, from China’s decline to India’s rise.
In some ways, India looks like a promised land for global corporations. It has structural advantages, its potential rivals have serious drawbacks, and the government provides incentives for investment.
Start with the structural benefits. Dominating a territory nine times the length of Germany and a population that will soon surpass that of China as the giant of the world, India is one of the few countries giant enough to host many large-scale industries, generating first and foremost for global markets and eventually for the booming domestic market. In addition, it is an established democracy with a long legal culture and a young, talented, English-speaking workforce. And India also has abundant achievements under its belt: its physical infrastructure has stepped forward, especially in recent years. , while its virtual infrastructure, namely its banknote system, has surpassed that of the United States in some respects.
Beyond those advantages, there is the question of alternatives. If foreign corporations don’t move into India, where else could they just pass?A few years later, other South Asian countries might have been considered candidates. But that has changed. Over the past year, Sri Lanka has experienced a historic social, political and economic crisis. Pakistan has been devastated by an environmental shock that has exacerbated its macroeconomic vulnerability and political instability. Even Bangladesh, long loved through development, was forced to borrow The International Monetary Fund after Russia’s invasion of Ukraine sent commodity costs soaring, depleting the country’s foreign exchange reserves. In the midst of this South Asian “polycrisis,” as economic historian Adam Tooze has called it, India stands out as a haven of stability.
Even more significant is the comparison with China, India’s ultimate apparent economic competitor. Over the past year, Chinese President Xi Jinping’s regime has been rocked by multiple challenges, adding slow economic expansion and leading to a population decline. The Chinese Communist Party’s draconian COVID-19 lockdowns and attacks on the personal sector have only made things worse. In recent weeks, Beijing has faced an increasingly restive population, adding the country’s most widespread anti-government protests in decades. The country’s turn toward authoritarianism at home and aggression – and government ineptitude that has tarnished the mythical “Chinese model” – have made democratic India even more attractive.
Finally, India has taken steps that, on paper, melt the game for foreign corporations. In early 2021, the government introduced its production-related incentive program to offer economic incentives to domestic and foreign production corporations that “manufacture in India. “then the PLI initiative, which offers significant subsidies to brands in complex sectors such as telecommunications, electronics and medical devices, has had some notable successes. In September 2022, for example, Apple announced plans to produce between 5% and 10% of its new iPhone 14 models in India; and in November, Foxconn announced plans to build a $20 billion semiconductor plant in the country in collaboration with a national partner.
However, if India is indeed the promised land, those examples deserve to be matched by many others. International corporations are expected to queue to shift production to the subcontinent, while domestic corporations are expanding investment to take advantage of the boom. However, there are few symptoms that any of those things are happening. In many ways, the economy is still struggling to return to its pre-pandemic equilibrium.
Take GDP from the India. Es certain, as enthusiastic commentators point out, that the expansion over the past two years has been exceptionally rapid, surpassing that of any other primary country. But this is largely a statistical illusion. Excluded, in the first year of the pandemic, India suffered the worst output contraction of any primary emerging country. Measured compared to 2019, GDP is now just 7. 6% higher, compared to 13. 1% in China and 4. 6% in the slow-growing United States. In fact, India’s annual expansion rate for the past 3 years has been just 2. 5 percent, well below the 7 percent annual rate the country considers to be its potential for expansion. The functionality of the commercial sector even weaker.
And the forward-looking signs aren’t much more encouraging. Announcements of new projects (measured through India’s Economic Monitoring Centre) retreated after a brief post-pandemic rally, remaining well below the degrees reached at the peak of the early years of this century. Even more surprising, there isn’t much evidence that foreign corporations are moving production to India. Despite all the announcements about India as an investment destination of choice, overall foreign direct investment has stagnated over the past decade, holding steady at around 2%. of GDP. For each and every company that has seized India’s opportunity, many others have had failed reports in India, adding Google, Walmart, Vodafone and General Motors. their Indian businesses, in spaces as varied as food delivery, education and wholesale e-commerce.
Why are global corporations reluctant to move their Chinese operations to India?For the same explanation of why national corporations are reluctant to invest: because the dangers are still too high.
Among the many dangers involved in making an investment in India, two are significant. First, corporations are not yet convinced that the policies in place at the time they invest will not be repositioned in a way that makes their investments unprofitable. And even if the policy framework remains hot on paper, corporations cannot be assured that regulations will be applied impartially but in favor of the “national champions”: the giant Indian conglomerates that the government has fostered.
These disorders have already had serious consequences. Telecommunications corporations have noticed that their profits have disappeared due to conversion policies. Decisions about permitted practices can be reversed after making gigantic investments under the regulations of origin.
At the same time, the national champions prospered strongly. As of August 2022, nearly 80% of India’s $160 billion accumulated in market capitalization so far this year is attributable to a single conglomerate, the Adani Group, whose founder suddenly became the third-largest one. World’s richest user. In other words, the game box is tilted.
Foreign corporations also lessen their dangers by partnering with giant domestic corporations. Getting into business with national champions is risky, as those teams seek to dominate the same lucrative fields, such as e-commerce. And other national corporations don’t need to venture into sectors governed through teams that have won broad regulatory favors from the government.
In addition to the main risks, there are several other reasons why foreign corporations are likely to remain timid about India. One of the key elements of the LIP program, for example, is to expand price lists for foreign-made components. The concept is to inspire corporations setting up in India to buy inputs domestically, but this technique particularly hampers top global corporations, as complex products in many sectors consist of loads or even thousands of pieces from the world’s most competitive producers. New Delhi has provided a strong deterrent for corporations planning to invest in the country.
For corporations like Apple planning to sell their products in India, the most important import price lists may be less of an issue. global market of around $30 billion, according to a study by Shoumitro Chatterjee and one of us (Subramanian). Only 15% of the population is middle class by foreign definitions, while the wealthy, who make up a significant percentage of GDP, have a tendency to save a large portion of their income. Both points reduce middle-class consumption. For top corporations, the risks of doing business in India outweigh the potential benefits.
Recognizing the growing tension between its protectionist policies and India’s global competitiveness purpose, New Delhi recently negotiated flexible industrial agreements with Australia and the United Arab Emirates. But those projects, with smaller and less dynamic economies, pale in comparison to those in India. Vietnam, for example, has signed ten loose industrial agreements since 2010, with China, the European Union and the United Kingdom, as well as with its regional partners in the Association of Southeast Asian Nations (ASEAN).
In any country, a well-known prerequisite for economic takeoff is to have key macroeconomic signals in a moderate balance: fiscal and external industry deficits will have to be low, as will inflation. But in India today, those signs are misplaced. Sync. Long before the pandemic began, inflation exceeded the central bank’s legal limit of 6%. Meanwhile, India’s existing account deficit doubled to about 4% of GDP in the third quarter of 2022 as it struggles to increase exports as imports continue to grow. .
Of course, many countries have macroeconomic problems, however, the average of those 3 signs in India is worse than in any other primary economy, such as the United States and Turkey. More worryingly, India’s overall government deficit of around 10% of GDP is one of the highest in the world, with interest bills alone accounting for more than 20% of the budget (by comparison, debt repayment accounts for only 8% of the US budget). UU. ). energy distribution companies, whose losses now amount to around 1. 5% of GDP, in addition to budget deficits.
A final impediment to expansion is a profound structural renewal that has undermined the dynamism and competitiveness of personal enterprise. India’s giant informal sector has been hit hard: first, through the demonetisation of high-denomination banknotes in 2016, which dealt a devastating blow. small businesses that kept their current capital in cash; then through a new goods and facilities tax the following year; and the COVID-19 pandemic. As a result, the employment of low-skilled personnel has fallen dramatically and real rural wages have declined, forcing India’s poor and low-income population to reduce consumption.
These hard labor market vulnerabilities are a cautionary reminder that the country’s much-vaunted virtual sector, whose promise seems almost endless, employs highly professional staff who make up a small fraction of the workforce. As such, India is a virtual powerhouse, no matter how successful, it is unlikely to generate enough economy-wide benefits to effect the broader structural transformation the country needs.
In other words, India faces 3 main obstacles in its quest for “the next China”: investment dangers are too great, political interiority is too great, and macroeconomic imbalances are too great. These barriers want to be removed before global corporations invest, as they have other options. They can take their operations back to ASEAN, which served as a global factory before that role was transferred to China. They can take them to complex countries, which played this role before ASEAN countries. Or they may stay in China, accepting the dangers on the grounds that the Indian option is no better.
If the Indian government is ready to turn the tide and remove obstacles to investment and growth, the positive claims of experts can come true. The country as a whole is failing to reach its potential.
Indian policymakers might be tempted to think that China’s decline is ordering India’s breakneck resurgence. But ultimately, whether or not India becomes the next China is not just a matter of global economic or geopolitical forces. This is something that will require a radical replacement of politics. in the New Delhi component itself.