On November 8, the Financial Times, arguably the world’s leading financial newspaper, published an opinion piece titled “India’s coming decade of outperformance”. In it, the chief Asia economist at the financial services company Morgan Stanley wrote forcefully about how the country should feature prominently on the radar of global investors given that it will offer a “compelling opportunity for multinationals and global investors in a world starved of growth”.
The Financial Times opinion pages are not the only place this sentiment is being expressed. Increasingly, experts across the world are arguing that India is on the cusp of an economic boom which would be driven by factors such as robust domestic consumption as well as a boost in manufacturing and exports.
However, there has also been a pushback. Other experts point out that a decade ago, there was an expectation that India would follow in the steps of China’s explosive growth. But that never materialised. Something similar is happening today, they argue: much of the growth in India today, for example, is simply a rebound from the country’s disastrous crash during the Covid-19 pandemic.
With much of the world slowing down, this debate has acquired an urgent edge. Will India offer the global economy a way out or will its growth mirror the poor performance of the past decade?
Strong growth, bright prospects
Arguably, the strongest cheerleader for the Indian economy has been American investment bank, Morgan Stanley. In November, it suggested India is ready for an “impending economic boom” and will become the world’s third largest economy by 2027.
The World Bank, too, in a report published in December, said India will “remain one of the [fastest] growing major economies” despite challenges. “While the deteriorating external environment will weigh on India’s growth prospects, the economy is relatively well positioned” to “navigate global headwinds” as compared to most other major emerging economies, it said.
Bob Sternfels, chief executive officer of strategy consulting firm, McKinsey, was even more emphatic in September: “Many individuals have stated that it is India’s decade. I truly assume it is India’s century.”
This optimism, they argue, is based on strong economic trends and growth projections for the Indian economy over the next decade.
India’s gross domestic product could more than double from $3.5 trillion now to cross the $7.5 trillion-mark by 2031, Morgan Stanley predicted. Economists at S&P Global, an American financial services company, believe India’s real gross domestic product will grow at an average 6.3% per annum in the 2021-’30 period. Bloomberg Economics sees similar high growth, rising to 7.6% by 2026 and peaking around 8.5% in the early 2030s.
This international exuberance is also finding domestic cheerleaders. Industrialist Gautam Adanipredicts India will become the world’s third largest economy “before 2030”. Within the next decade, Adani anticipates, India will start adding a trillion dollars to its gross domestic product every 12 to 18 months.
Capex increases
Frequently cited to explain this upcoming boom is the growth of India’s capital expenditure. Capital expenditure is the money businesses or the government spend towards the creation of new physical assets such as a new plant or bridge. It is usually an indicator of increased economic activity.
Revival of the capital expenditure cycle by the government and its focus on boosting manufacturing is encouraging the economy, argues Jigar Gandhi, the India Investment Specialist at British asset management company, Schroders. “Recent signs show that capex as a share of GDP has started inching up after declining from 21% to less than 17% in the last decade,” Gandhi wrote on December 14.
Bloomberg’s Senior Editor, Chris Anstey, argued in a similar vein in November: “There is now tangible evidence that [the Indian government] is putting its money where its mouth has been in terms of building infrastructure to support the nation’s manufacturers”. The government is now spending nearly 20% of its budget on capital investments, he points out.
Even more significant though might be the fact that India’s own private sector is stepping up its capex spending, providing strong proof that it expects the economy to grow. In September, The Economist reported on the fact that the Tatas are setting aside a “staggering” $90 billion as capital expenditure from 2023 to 2027. “I firmly believe that this is going to be India’s decade,” the article quoted the chairperson of Tata Sons.
Domestic consumption
One of India’s greatest strengths which allow for such expansive forecasts is the massive size of its domestic market – which many predict will continue to grow.
The World Bank says India will remain one of the fastest growing major economies despite challenges because of “robust domestic demand”. Indian domestic consumption could more than double to $4.9 trillion by the end of the decade as consumers are likely to have more disposable income because of a possible “flip” in income distribution, Morgan Stanley predicts.
Domestic consumption making up a major chunk of India’s gross domestic product also helps protect the economy to some extent from global economic shocks, Fitch, an American credit rating agency, suggested.
‘Factory of the world’
Apart from its own size, favourable geopolitics might help its economy. Specifically, India might be one of the major beneficiaries of the move to try and shift manufacturing out of China as hostilities with the West grow. “The widening rift between the [United States] and China has provided India with a golden opportunity to boost its role in supply chains,” Anstey writes.
Add to this China’s struggles with the Covid-19 pandemic and multinationals are increasingly turning to a so-called “China Plus One” strategy to ensure they are not solely reliant on one country for manufacturing. For example, Foxconn, a Taiwanese electronics contract manufacturer that produces the bulk of Apple’s products, announced a new $19.5 billion semiconductor project in Gujarat in September.
Domestic policy making will also help India in becoming a “factory to the world,” Morgan Stanley argues. Cuts in corporate taxes, investments incentives and spending on infrastructure are helping drive capital investments in manufacturing.
The biggest of these policy decisions are a form of Union government subsidies called the Production Linked Incentive Scheme, which gives incentives to specific industries to boost domestic manufacturing.
As a result, Morgan Stanley predicts the share of manufacturing in India’s gross domestic product could rise from 15.6% now to 21% by 2031.
Bleak growth prospects
However, not everyone is convinced that the next decade would be India’s. The most prominent critics of this line are Arvind Subramanian, former Indian chief economic adviser to Prime Minister Modi and Josh Felman, former head of the International Monetary Fund’s India office.
They wrote in Foreign Affairs in December that the argument that the Indian economy is ripe for a boom is “largely a statistical illusion”. Far from catching up with China, India is falling behind even further, they point out: measured relative to 2019, India’s gross domestic product today is just 7.6% larger, compared with 13.1% in China. India’s economic growth rate over the past three years was just 2.5%, compared to the 7% annual rate it considers to be its “growth potential,” they said.
Suyash Rai, deputy director and fellow at the think-tank Carnegie India, echoed Subramanian and Felman, warning that comparing India’s growth with others can be misleading after a crisis such as the pandemic. “The economies that suffered a sharp decline [during the pandemic] are more likely to register a higher growth rate because of the rebound,” he said.
From April to June 2020, India’s economy contracted by a massive 24.4% – the worst fall in its history.
Rai also points out that India’s economic slowdown predates the pandemic, illustrating a fundamental slowdown unconnected with an act of God like the pandemic. India’s GDP growth was only 4.1% in the first three quarters of the financial year 2019-’20. Those figures were the lowest since the financial year 2008-’09 and the second lowest since 1991-’92.
“Since there was no global crisis at that time, perhaps these causes relate to domestic political economy or institutional or policy issues,” Rai suggests. It is unclear if these problems have been solved, he argues.
The next China?
Even if India manages to benefit from a “China Plus One” strategy, Bloomberg columnist Andy Mukherjee argues it might do little to blunt an economic slowdown driven by the after-effects of the pandemic in areas such as education and healthcare. “Those challenges are immediate, whereas the supply chains India is hoping to set up from scratch by throwing subsidies at investors – and offering them the protection of high tariff barriers – are a long-term gamble,” he wrote.
Mukherjee points out that while the government might be spending significantly on the production-linked incentive scheme, its effects are still to be felt. “Only 15% of the $33 billion in private investment approved by the government under its production-linked incentive program has fructified so far; fewer than 200,000 jobs were created as of September, compared with expectations of around 6 million,” he wrote.
Subramanian and Felman also suggest there is “no inevitability, no straight line of causation, from the decline of China to the rise of India”. If India is the promised land for manufacturing, Subramanian and Felman argue, “international firms should be lining up to shift their production to the subcontinent, while domestic firms boost their investments to cash in on the boom”. But there is not enough evidence that foreign companies are shifting manufacturing activities to India, they said.
Domestic concerns
Critics such as Subramanian and Felman also push back on arguments around the size of India’s domestic market. They point out that those high-skilled workers employed in India’s “vaunted digital sector” – who help drive domestic consumption – comprise only a small portion of the country’s workforce.
Overall, the “employment of low-skilled workers has fallen significantly, and real rural wages have actually declined, forcing India’s poor and low-income population to cut back their consumption.” As a result, forecasts of growth that assume domestic consumption as its driving force could well be shaky.
India’s stock market has attracted global attention, given its performance at a time of global slowdown. However, the Financial Times’ Robin Wigglesworth, strikes a note of caution at relying too much on this indicator.
“The link between [the gross domestic product] growth and stock market returns is murky at best,” he wrote. “Otherwise, Chinese equities would have been a world beater over the past decade, rather than having actually destroyed value over that period. In fact, the MSCI China Index is today lower than it was since its inception in 1994, despite [gross domestic product] growing nearly tenfold over that period.”
This talk about India’s economic rise has played out before, Wigglesworth points out. India’s breakneck growth, was much talked about in the mid-2000s. “The current bout of optimism around ‘the New India’ has a heavy whiff of ‘Brazil Takes Off’ hype about it,” he said, referring to similar optimism expressed by The Economist about Brazil’s economy in 2009.