But it is still uncertain whether India will succeed in replacing China as the workbench of the West and thus the main target of foreign investors. There are mutliple reasons for this. It was only at the beginning of December that the World Bank certified that the country was better equipped than other emerging countries to be able to assert itself in the global economic headwind.
The tighter monetary policy of the central banks (raising interest rates, note), the poor economic prospects with simultaneously rising prices and inflation would also slow down India’s economic growth.
home market as a hedge
The World Bank expects growth of almost seven percent, mainly thanks to the large domestic market and robust demand there. This makes India one of the countries with the strongest economic growth in the world.
One percent less growth in the US results in 0.4 percent less growth in India. In the other emerging markets, this value is almost four times as high, at 1.5 percent. Most notably, the World Bank acknowledges India’s progress in creating a better regulatory framework in the financial sector. Despite all the optimism, the World Bank also sees a need for action here.
Great potential, high hurdles
The respected British business magazine The Economist asked in an article in May whether now was the moment for India to step out of China’s shadow and came to the conclusion: probably yes. In November, investment bank Morgan Stanley’s Asia chief analyst Chetan Ahya stressed that India would account for a fifth of all global growth over the next decade.
But Arvind Subramanian and Josh Felman see major hurdles and were very skeptical in a joint article for “Foreign Affairs” – and they are proven experts: Subramanian was economic advisor to the Indian government from 2014 to 2018, Felman was representative of the International Monetary Fund from 2006 to 2008 in the country.
investing risky
They identify three problem areas that are currently preventing India from seizing the opportunity presented by China’s own difficulties. Firstly, the investment risks are too high: Foreign investors in particular have to fear that the political framework that applies at the time the decision to invest will be changed dramatically later – or that Indian authorities will in practice prefer domestic competitors.
Big names like Google, Walmart, Vodafone, General Motors and Amazon have already burned their fingers and have not increased or even reduced their commitment after corresponding experiences. And according to the two experts, the sales market is: India is huge, but the important middle class is very small at around 15 percent of the total population.
Strong protectionism
According to Subramanian and Felman, a support program launched last year (Production Linked Incentive, PLI), with which the Indian government wants to boost production in many sectors, has a fundamental problem. In order to strengthen domestic industrial production, India levies high tariffs on components.
In many sectors, however, products are assembled from hundreds or thousands of parts, most of which are supplied from many different countries. In other words: according to current standards, India is too protectionist to lure large-scale international corporations away from China.
India has recently only concluded free trade agreements that remove such barriers with Australia and Saudi Arabia. For comparison: Vietnam has concluded ten free trade agreements since 2010, including with China, the EU and Great Britain.
Difficult key data
The key macroeconomic data also speak against an economic boom: the foreign trade deficit is just as high as inflation, and the current account deficit has now risen to four percent of GDP. With the exception of the USA and Turkey, these three indicators are not so bad in any other major economy.
Because of the high national debt, more than 20 percent of the budget was spent on debt service – for comparison: in the USA it is eight percent, in Austria one percent this year. The currently high growth rates of seven percent would also be deceptive: In 2020, India recorded the sharpest slump in production of all emerging countries.
Obvious, but not mandatory
Taken together, all of these factors currently argue against India becoming the main beneficiary of the West’s signs of a stronger turning away from China. Because, according to Subramanian and Felman: For international corporations, there are enough alternatives to China – and India – with a subsidized relocation to the USA and Europe or to other Southeast Asian countries.
