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The world needs a new economic motor. Could India fit the bill?

THE WORLD could use more economic hope. The war in Ukraine has dealt a heavy blow to global growth prospects. Lockdowns and a property slowdown have sapped China, the erstwhile growth engine, of its vim. Given its size and potential, it seems reasonable to ask if India could be the world’s next economic motor. In April the IMF reckoned that Indian GDP might grow by more than 8% this year—easily the fastest pace among large countries. Such a rapid expansion, if sustained, would have a profound impact on the world. But, in large part because of the shifting structure of the global economy, things are not as simple as India taking up China’s mantle.
In the 2000s China accounted for nearly a third of global growth—more than America and the European Union combined—adding new productive capacity, each year, equivalent to the present-day output of Austria. By the 2010s China’s contribution had roughly doubled, such that each year of expansion was worth an additional Switzerland. From the turn of the millennium to the eve of the pandemic, China grew into the largest consumer of most of the world’s major commodities, and its share of global goods exports rose from 4% to 13%.
Can India repeat such feats? It is the sixth largest economy in the world – as was China in 2000. And today its production is roughly where China stood two decades ago. China managed an average annual growth rate of around 9%. India grew at just less than 7% per year in the same period. This could easily have been better, however, had it not been for policy mistakes – such as Prime Minister Narendra Modi’s shocking decision to withdraw some banknotes in 2016 – and macroeconomic vulnerabilities, including an over-expanded financial sector. The government would have learned in advance; Both policy makers and banks have worked to address the other. Before the war in Ukraine, the IMF had estimated that India could grow by 9% this year. Some optimists argue that, under the right circumstances, India can manage such rates on an ongoing basis.
However, a closer look reveals that India is not a substitute for China. One problem is that the world economy is much larger than it used to be, such that an increase in India’s GDP weighs down global growth. Sustainable annual growth of 9% will vastly improve the lives of Indians, and significantly tilt the balance of global economic and political power. But this will not mean that the world economy will revolve around India, as it has done around China in the last two decades. For example, India’s contribution to global growth will be smaller than the combined contribution of the US and Europe.
Perhaps more important, global economic conditions may be significantly more prohibitive than the conditions that enabled China’s rise. From 1995 to 2008, the value of world trade increased from 17% to 25% of global GDP. The share of goods exports participating in global value chains increased from about 44% of world exports to 52%. China was at the forefront of both trends. According to an analysis of “hyperglobalization” published in 2013 by Arvind Subramaniam of Brown University and Martin Kessler of the OECD, a wealthy country think tank, it was the most prominent trading country since imperial Britain.
In contrast, India is a commercial mine. It accounted for less than 2% of global merchandise exports on the eve of the pandemic. It hopes to increase that share by investing in infrastructure, providing public subsidies to manufacturers and negotiating trade deals. But times have changed. World trade as a share of global GDP has fallen since the beginning of 2010. Economic nationalism can prevent a reform. India can nevertheless expect an increase in its exports by capturing market share from other economies including China. But businesses and governments that were once willing to rely heavily on China in the name of efficiency have become more cautious. Their reluctance to depend too heavily on a single source of supply could stifle India’s ambitions.
Dominating global supply chains may not be the only route to economic impact. India is a precocious exporter of technology and business services; Although its GDP is only one-sixth that of China, its exports of services lag only behind that of China. Research published in 2020 by Richard Baldwin of the Graduate Institute in Geneva and Ricard Forslid of Stockholm University argues that technological change is expanding the range of exportable services, and allowing workers in poor countries to compete with service workers in the rich world. Providing more opportunities for But while technology and business services continue to flourish in India, their expansion may be limited by an inadequate system of education, which performs well on measures of enrollment but not on learning outcomes, and by rich-world service sectors. by their protected nature, which may be better insulated against foreign competition than industrial workers against Chinese imports.
subcontinental boom
Even if India manages to clock a growth rate closer to 6% as compared to 9%, it will be nothing to sneeze at. This would make India the world’s third largest economy by the mid-2030s, at which point it would contribute more to global GDP each year than Britain, Germany and Japan. Indian demand for resources would then drive up commodity prices; Its capital market will harass foreign investors. A large English-speaking population and a democratic political system, if India can keep it, could allow Indian technology and cultural exports to exercise greater global influence than similar income levels to China.
But by then the world would have recognized that the rise of China was a unique event. India’s development will be world-changing. But you should neither hope nor fear a repetition of the Chinese experience.
May 15, 2022 12:56
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