Can India be the next China?
2024.08.22 06:54
Investing.com — India’s rapid economic growth, coupled with China’s recent economic challenges, has sparked debates about whether India could emerge as the next global economic powerhouse, similar to China’s transformation over the past few decades.
China and India, two of Asia’s largest economies, have seen their economic trajectories diverge in recent years. “China’s economic recovery has been weak after the pandemic while India’s has been strong,” said analysts at UBS Global Research.
“China is also facing many structural challenges including a rapidly aging population while India has a relatively young and rising labour force and a far friendlier external environment,” the analysts said.
This divergence has raised questions about whether India can replicate China’s success as a global manufacturing hub and consumer market, and if it can exert a similar influence on global commodities and energy markets.
One of the core aspects of China’s economic rise was its transformation into a manufacturing powerhouse. By 2023, China accounted for nearly 30% of global manufacturing value-added, while India’s share stood at just 3%.
Despite India’s favorable demographics, with a younger and growing labor force, it remains unlikely that India will challenge China’s manufacturing dominance in the near future.
India’s manufacturing sector currently contributes only about 13% to its GDP, compared to China’s 32% in 2000, UBS added. This structural difference in their economies suggests that while India may increase its manufacturing output, it is not positioned to replace China as the world’s factory anytime soon.
However, India does have the potential for rapid manufacturing growth, supported by abundant cheap labor, improving infrastructure, and favorable policies for foreign investment.
India’s domestic market, which is equivalent in size to China’s around 2006-2007, presents significant opportunities for growth. Household consumption in India has doubled in the past decade, and UBS expects India to overtake Japan by 2026 to become the world’s third-largest consumer market.
If India maintains its current pace of economic growth, its domestic market size could reach China’s current level before its GDP does.
High-quality job creation will be crucial for sustained consumption growth in India. As the country grows, demand for modern durable goods and automobiles is expected to rise, fueling further economic expansion.
China’s economic growth has had a profound impact on global energy and commodities markets, driven by its industry-heavy, capital-intensive growth model. India, on the other hand, is less focused on industrial growth and is unlikely to replicate China’s demand for global resources. Although India is a large importer of oil and coal, its growth is expected to be less energy-intensive than China’s.
India’s unique resource availability and urbanization patterns suggest that its demand for base metals, like iron ore, may differ from China’s. While India is expected to see rapid growth, its impact on global commodities markets may be less significant than China’s.
