Can India Replace China as the World’s ‘Factory’?

Since the beginning of the century, India has emerged so strongly in the global economic scene that it “captivated the world’s imagination,” according to an article published by Foreign Affairs.

But according to the same article, India returned to the forefront of economic talk, especially with the current Chinese economic problems, and questions were raised about the possibility of India replacing the Chinese role as a factory for the world and then turning into the engine of global growth.

World Bank data on China and India show that the two countries were in a fairly similar economic position as measured by real GDP: In some years, India had higher output than China, while China was higher than in others. But the two countries have parted ways since the end of the sixties of the last century, and the difference began to widen significantly.

 

World’s Alternative

Although India has achieved a lot since its independence, China’s achievements are much greater, and with the large demographic size of the two countries, India lost the competition for a long time until it came to the competition again as it did at the beginning of the century, before disappearing due to the global financial crisis.

In 2021, India achieved a remarkable growth rate of close to 9%, slightly higher than China’s 8.1%, significantly higher than the global average of 6%, the US rate of 5.7%, and expectations that India will surpass Germany and Japan by 2030, as a result of doubling its current GDP, and achieve average growth above 6% over the next decade.

This opportunity for India coincides with economic problems in China, which are complex problems in which the Chinese state’s desire to change its model, and this desire is parallel to imbalances that lead to slowing growth in China.

It is expected that the Chinese leadership, which has maximized the concentration of power in its hands, may pursue more economic policies less favored by foreign investors, even domestic ones.

The combination of all these factors means that the Chinese giant may change its position globally, leaving a large vacuum for others to fill, so some observers believe that India has the opportunity today to rise.

Meanwhile, the West today wants this Indian rise, as moving from China to India will not be at a high price, and its location enables it to be an easy and cheap alternative in the current global production chains.

India’s political positions, democracy and many of its foreign political relations make it more acceptable to Western centers, its capitalists and companies, and safer on a strategic level.

 

Demography

Although China’s population exceeds India’s, it is important to pay attention to the “age dependency ratio,” which measures the number of people dependent on other members of the total population in terms of their age group only by counting those under the age of 15 and over 64.

The United Nations data show that China was able to reduce its age dependency from nearly 80% in 1970 to only 35% in 2010, but the proportion of dependents in the economy is increasing again, reaching 42% in 2020. These low percentages have secured a large base of skilled and unskilled workers for China, whose presence in its economy is indispensable to the world’s factory.

On the other hand, the percentage in India in 1970 far exceeded the Chinese percentage at 87%. Although it also decreased over the past years, this decline was at a slow pace compared to China, until it reached in 2010 about 50%, and in 2020 to about 47%.

But future trends are what distinguish India from China, with India expected to fall to 46 percent in 2030, rising to 50 percent in 2050 and 65 percent in 2100.

China is expected to reach 67% in 2050, and nearly 84% in 2100, all with high growth rates in India and low growth rates in China, which means more in India than in China, or than would be the case in many other countries.

India has what it has to invest in these human surpluses, and it is precisely the poor state of Indian investment in the past that makes it the most likely to be at the forefront of the economic landscape, at least in a hypothetical case that looks only at the potential.

 

Investments Ahead

Official data show a large difference in China’s and India’s annual capital accumulation or the proportion of the investment spending each year of GDP.

Since the sixties of the last century, India has surpassed China only in two years, the first in 1962 as a result of the decline in the ratio in China, and the second in 2007 as a result of a slight relative decline in China, and a significant relative rise in India, but an exceptional rise that has not yet ended and things have returned to normal.

These percentages do not give us a complete picture. They do not give us a picture of the very large difference in the accumulation of investments, first because India’s GDP is small compared to China.

Second, because the Chinese ratios are much higher than the Indian rates over many years and continuously. This means that if, assumingly, India were to invest $10 billion annually, that is 10% of its GDP, and if China invests $25 billion, that is 15% of its output, and for 10 years, China will have accumulated $250 billion, while India will have accumulated only $100 billion.

The problem is that China today, according to experts, has exhausted its previous economic model based on a small share of workers in the form of consumption, offset by a large share of others in the form of investment, and China has to shift its economy towards higher consumption rates that push towards a growth and development model driven by domestic demand, not by investment directed towards external demand in the form of exports.

India today has extensive areas of investment, specifically in infrastructure, which is the missing piece in the story of India’s economic rise, all of which is conditional on its ability to turn this untapped potential into reality.

Regarding the human capital in the two countries, India has the potential to outperform China in terms of having the right age group for work, but it lags behind in terms of its participation in the labor market.

In 2019, 52% of those aged 15-64 were actively working or looking for work in India, down from 60% in 2005, while in China, it was 76% in 2019, down from a peak of 84% in 1990.

This is an indication that India’s current investment in its human capital is weak and an indication that India may not be able to invest it in the future either, and its human surplus may become a burden rather than an opportunity to achieve growth and development and take the position of the world’s factory and engine of growth.

Despite India’s recent high incentives for foreign firms, foreign companies have not yet lined up to enter India or exit China, and it seems that India still has a long way to go to demonstrate its ability to achieve internal structural changes, after which it can unleash its potential and attract foreign investment.

India is still far from ready to replace China and even far from replacing China completely. India still faces many challenges in the field of economy and economic reform, despite the enthusiasm of some politicians and the media.