Is India the new China?
October 12, 2023
4 minutes to read
In 2013, India was the tenth largest economy in the world. By 2023, it had moved up to fifth spot. While the US (1) and China (2) are still well in the lead today, Japan (3) and Germany (4) are now seeing this country closing in through their rear-view mirror. Its tempestuous growth figures – 9% growth in 2021, 7% in 2022 – have also fanned the flames of interest among investors. Both local Indian and foreign investors have been beating a path to the financial markets in recent years. Once again, the Indian stock markets are setting new records this year. Economists believe India's growth spurt is far from over (making this also true of the investment potential). India’s gross domestic product (which is the total value of all goods and services produced in a year) is forecast to double again in the next few years: from USD 3,500 billion in 2023 to USD 7,500 billion in 2031. Should this happen, the country will soon become the third largest economy in the world. Although the economic forecasts are high, India also has many targets it must hit on its way to getting the job done successfully. An introduction...
1. Demographic advantage: rising to 1.6 billion Indians
India can draw on a huge population. The country now has more than 1.4 billion inhabitants, and overtook China in 2023 as the country with the highest population in the world (the two countries account for one third of the world’s population). Although the Chinese economy is presently five times larger than India’s, India’s population growth is likely to help narrow the gap. India still has growth potential ahead of it. Over the next 50 years, the population will continue to grow – to 1.6 billion. To put that in perspective, by 2070 there will be as many people living in India as there were on the whole planet in 1900! At the same time, the Chinese population will start shrinking from 2024 and fall below 800 million by 2100. And while the US, Europe and China are all facing an ageing society, India is far from doing so. The average age in India is currently under 29; in China it is around 38. In other words, India has a very large pool of young workers who can drive the economic engine. And it is a group that is also growing day by day. Interestingly, the size of India’s workforce today is the same as that of China in 2007. Total GDP and GDP per capita are similar. But it’s not all roses and rainbows. Although India has a huge demographic dividend, it is not yet being exploited to its fullest. Although the level of education is rising, youth unemployment has been floating around 25 to 30% for years. In addition, the participation rate in the workforce for Indians of working age is barely 41%. In other words, of all the Indians who could work, only four in ten (officially/effectively) are working. Women's participation rate in the workforce is 24%.
2. Infrastructure: all roads lead to Delhi
The Indian government has invested heavily in infrastructure in recent years. Over the past 10 years, for example, more than 70,000 kilometres of roads have been added, and the motorway network is now fifty per cent longer than it was in 2013. In the same period, the number of passengers on domestic flights has also doubled. Things are on the move. Since 2019, every household in India has also had access to electric power. This is huge progress, as in 2000 power outlets and light switches could still only be found in 60% of Indian households. And it wasn't just reels of power cables that have been rolled out at a rapid pace over the past decade. It is the same for water supplies, which are still being installed on a large scale. The government aims to have drinking water out of a tap in every home in India by 2024, even in the remotest villages. The expansion of these basic utilities means major progress, particularly for families in rural areas. Time that used to be spent collecting firewood or fetching water can now be used for more productive purposes, which has a significant impact on the economic independence of these families. Not only have power supplies become more accessible, but India is making efforts tomake its energy mix more sustainable. Coal and oil have so far provided the foundation for India’s industrial growth and modernisation. However, a change of course is (perhaps) underway. For one thing, the country wants to promote sustainable economic development (away from carbon-intensive industry). For another, it wants to improve energy security, as the country imports a lot of fossil fuels. Although coal still accounts for 68% of energy supplies, and investments in fossil fuels are still being subsidised, the share of renewable energy is increasing. Today, this share is 28% (excluding nuclear). By 2030, the country is aiming for a proportion of more than 60% renewable energy, primarily from solar and wind energy. The expansion of all this infrastructure (and the large pool of cheaper labour) also acts as a magnet for foreign companies. This is underlined by the impressive 400% increase in the total value of announced European and US investments in India between 2021 and 2022. Of course, China and the coronavirus crisis also had a hand in this. At a time when many large companies are trying to reduce their dependence on China (geopolitical tensions, diversification of supply chains, etc.), India appears to be taking advantage of this. For example, well-known names such as Apple, Samsung, Alphabet and Foxconn have invested heavily in India in recent years at the expense of China. Still, this doesn't mean India will be the new “factory for the world” any day soon. Currently, the country accounts for just 2% of global goods exports, while China accounts for around 15%. Substantial government investments naturally also come with a heavier debt burden. According to the IMF, public borrowing amounts to more than 83% of GDP (for comparison: China 77%, US 121%, Belgium 105%). In 2000, it stood at 73% of India’s GDP. Compared to other emerging countries, the debt ratio is relatively high, but the rising level of debt of Indian households is particularly striking. Household debt has now risen to 35% (for comparison: China 61%, US 74%, Belgium 60%), while in 2000 it was just 2.5%.
The Indian IT services and outsourcing sector has doubled in size over the past decade. This growth has helped India catapult itself to fifth place in the world rankings of service exporters. A global shortage of IT specialists, combined with a shift to cloud-based services, suggests this upward trend is likely to continue. India’s biggest challenge now is finding enough talent. There are already around 5 million people working in the technology sector, and the job market for anything and everything that relates to tech and software is red hot. The tech-friendly climate has also proved to be fertile ground for startups and unicorns (a startup with a market valuation of at least USD 1 billion). India currently has the third largest herd of unicorns, behind the US and China. With the help of its strong IT sector, the government has now digitised most of its services. On UMANG, the government’s super app, no less than 1,745 services are available to citizens: applications for subsidies, maintaining medical records, storing important documents in a digital safe, searching for files in court... all this can be done on a single platform. In recent years, the government has also rolled out a biometric identification system for all Indians called Aadhaar. Using iris and fingerprint recognition, each Indian has been given an Aadhaar ID consisting of a unique 12-digit number. It is similar to a national ID number, but comes with many practical applications. Aadhaar not only provides proof of identity and place of residence, but Indians can use it to identify themselves and log in to all kinds of platforms. The identification number can also be linked to a mobile number and a free bank account. This ambitious project is a leap forward for India in digitising and streamlining its (sluggish and bureaucratic) government services. It is also worth mentioning the UPI – Unified Payments Interface. This is an application that connects all Indian banks and account holders via their mobile number. Thanks to UPI, Indians can use their smartphones to transfer money to each other or to companies free of charge and seamlessly, no matter the bank with which they have their account. The service is extremely popular: 10 billion transactions were recorded in July 2023 alone, making it the world’s most successful digital payment application.
4. Financial inclusion
Thanks to the wave of digitalisation, millions of people have now been brought into the Indian banking system. In less than 10 years, more than 500 million Indians opened a free bank account (unfortunately not with us; if they did, they would receive a free account as well as 5 euro cents per transaction ;-) ).
From Kerala to Rajasthan, every Indian can open a free account with a bank of their choice. This not only ensures everyone can access regular banking services, but also indirectly reduces bureaucracy (for example, benefit payments are paid directly into an account) and combats corruption. The digital trail makes it much more difficult to embezzle cash flows or to cheat on payments. The formalisation of the banking system has also created more interest in investing among resident Indians in recent years. The number of custody accounts is now more than 127 million and has doubled in the last two years alone. This means that almost 1 in 10 Indians are investing today. The emerging middle class is also a trump card for India’s economic development. As of now, more than 430 million Indians already belong to this group (family annual income of between USD 6,700 and 40,000). This is about one third of the population. The increasing purchasing power and consumption of this group (60% of GDP is accounted for by personal consumption) will also help to bolster domestic demand over the coming years.
India is at a fascinating crossroads. The country has the potential to soar as a global economic force, but work still needs to be done on several fronts to achieve this dream. The challenges are sizeable, and success is not guaranteed. However, if there is one thing the past decade has shown, it is that you should never underestimate India. It will be interesting to see how the country navigates this mix of opportunities and challenges in the coming years. Investing in India? Investing in an emerging country like India comes with opportunities, but also with risks. One possible way to spread the risks is to diversify your investments using a tracker or investment fund.
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