India Won’t Replace China Economically, but Westerners See India as an Alternative for the Future.
Everyone now wants to be in Narendra Modi's good books.
Narendra Modi is now the one that everyone is rushing to receive in Europe. The Indian Prime Minister was the first foreign head of state to be received by Emmanuel Macron, the French president, after his re-election for a second term as head of France in April 2022. Shortly before, the German Chancellor, Olaf Scholz, had welcomed his “superpartner”, and in April 2022, Boris Johnson, the British Prime Minister, had gone to New Delhi to greet his “best friend”.
In a few weeks, the view of India by the three leading European powers changed radically. Because of the distance from China, determined to advance its vision of a new world order based on its strategic alliance with Russia, the Asian subcontinent is now perceived as an unavoidable counterweight.
Arbitration in India's favor
The trade-off in favor of India was already perceptible in investment flows. For example, in the first half of 2021, the volume of acquisitions in the technology sector has quadrupled in India, while it has “only” doubled in China, even though the mass of these investments is still twice as high there, at around 13 billion dollars, compared to 6 in India.
Now, diplomatic activity is taking over, stimulated by the Russian aggression against Ukraine. The new geopolitical equation should favor a lasting rapprochement. India depends on Russia for its arms supplies, and Russia is now linked, in the famous words of President Xi Jinping, by “no limits friendship” to China, itself India's most feared enemy. A rebalancing is necessary.
This could lead to new agreements. After concluding a defense and security partnership during his visit to the country in April 2022, Boris Johnson hopes to follow up with a free trade agreement by fall 2022.
India is a safer option
For its part, the European Commission has recently relaunched discussions, interrupted since 2013, on a trade agreement. European companies have every interest in following suit. Participating in the growth of Asian markets via India is a much more secure option than what Xi Jinping's China is now offering, in the midst of a shift towards a dirigiste economy. The takeover of China's large technology companies had sounded a warning. Now, the priority given to Xi Jinping's Zero-Covid policy, motivated by political objectives, at the expense of the economy, is a confirmation.
The giant Apple is drawing the consequences by reviewing its industrial organization. Its subcontractors are being asked to increase their production outside China. India and Vietnam are among the host countries selected for these asset transfers. Of course, no one claims anymore that India will become the new China. The gap of one to six between the two economies, in terms of GDP, is irrecoverable, even if with 1.41 billion inhabitants, China is approaching the moment of leaving its place as the most populated country in the world to India, which already has 1.39 billion citizens.
This is not only an advantage because India is struggling to fight against extreme poverty. The pandemic has worsened the situation of the poorest, who are experiencing a drop in income. On the other hand, the demographic power holds the promise of the huge market represented by a growing middle class, which is growing by 20 million people each year, the equivalent of the population of Australia. Some companies have taken this on board.
A new growth model is being put in place with India
For GroupeADP, for example, the subcontinent represents a priority development zone. And the management considers that the acquisition of the airport operator GMR offers the group exceptional growth opportunities.
The Indian economy is expected to be the fastest-growing among the major countries this year, with GDP growth estimated at 7.3% by BNP Paribas economic research, compared with 4.8% for Chinese GDP. In the short term, the country is heavily affected by inflation and rising interest rates. Growth forecasts for the entire fiscal year remain favorable but have been revised downward, and household consumption is proving particularly fragile.
The Economist magazine, however, sees a new growth model emerging in India. No Chinese or Korean-style industrial boom is expected, but a strong and steady expansion of around 6% to 8% per year over the next decade.
The digitalization of the Indian society is a huge opportunity
In support of this perspective: the digitization of Indian society, is being carried out at a rapid pace and is bringing entire sections of the informal economy into much more efficient modernity.
Another factor is the new boom in the technology sector, which has doubled in size in ten years, in a country where foreign companies know they can draw on an unprecedented flow of 500,000 additional engineers per year.
The risk, however, is that these prospects rely too much on one man. Narendra Modi, credited with bringing about important reforms for the future, could be re-elected in 2024. But the Prime Minister is developing authoritarian tendencies that are troubling for democracy and the economy. His discriminatory policies against Indian Muslims, which are his electoral staple, could lead to serious unrest.
This makes India an extremely promising destination at a time when more and more Western companies are looking for an alternative to China in the Asian region, but it should be handled with extreme caution.
Some reading
The 7 Stages of a Bear Market — Where Are We With Bitcoin? Probably between panic and accumulation/stabilization.
The Decoupling Has Begun — The Great Dilemma of Western Companies Regarding China. Doing without China altogether is impossible, but the big companies will limit their exposure as much as possible.