Growing pains: Will India replace China as global growth leader?

India already knocked off China as the most populous country in the world. Now, it’s going after China’s title of global growth engine, a crown that economists believe India could claim by 2028. To get there, though, the developing nation will need to address some growing pains.

“I think everyone would be making a mistake if they didn’t bet on India over the next 10 years,” said Samir Kapadia, the founder and CEO of India Index, a marketplace connecting Indian suppliers with American buyers.

The world’s fifth-largest economy is expected to soon climb over Japan and Germany to the No. 3 spot. However, that’s where it’ll settle for quite some time.

“India overtaking China in terms of size of its economy is a long way out,” said Alexandra Hermann, a lead economist at Oxford Economics.

While China’s gross domestic product is more than four times that of its neighbor, India is in a prime position to pull away business from Asia’s powerhouse. 

“America is in a state of panic right now as it relates to how they can get outside of China or conduct what they call China+1,” Kapadia said. “So India is not just getting a second look; in many cases, they are getting a first look.”

So what can India do to make sure companies like what they see? 

China is not going away quietly

China, the worldwide leader in economic growth over multiple decades, just beat all estimates for the first quarter of 2024, growing at a 5.3% annual pace. But the International Monetary Fund (IMF) predicts China’s growth for all of 2024 will still come in at 4.6%, dropping to 4.1% in 2025. 

Meanwhile, the IMF raised India’s growth forecast to 6.8% for 2024 and another 6.5% in 2025. India grew 7.8% in 2023.

“That makes India easily the fastest-growing economy in the world,” IMF Executive Director Krishnamurthy Subramanian said.

“We have to keep in mind that India is also coming from a relatively lower base, right?” Hermann said. “The Chinese economy is still considerably larger, manifold larger than the Indian one. So it’s not really surprising that India can pull off much, much stronger growth rates than China as sort of a more emerging-market peer, let alone any advanced economies.”

According to Bloomberg Economics, China accounted for nearly a third of global growth in 2023, while India drove 17.5%. But if India keeps growing while China keeps slowing, they see that balance shift in 2028. 

How India is pulling interest from China

Kapadia told Straight Arrow News that interest in India is reaching new heights.

“It’s mainly predicated on the notion that American companies can’t afford to work with China anymore,” Kapadia said.

Kapadia said tariffs on Chinese goods are giving companies pause, especially after reports that former President Donald Trump is weighing a 60% tariff on imports if elected in November. Trump confirmed his consideration on Fox Business, saying, “Maybe it’s going to be more than that.”

A ramped-up trade war with China will only expedite moves corporations are already making to diversify away from China. 

“It’s not just the national security implications, the intellectual property issues, the ongoing concerns around forced labor, environmental standards, the list continues to grow,” Kapadia said.

And India, the world’s largest democracy, is making a good case to pull in business. 

Take Apple as an example. CEO Tim Cook called India a “huge opportunity” after meeting with Prime Minister Narendra Modi in 2023. The same year, Apple opened its first physical store in the country and made one in every seven iPhones in India, double the amount produced there a year before. 

This comes as U.S.-China relations continue to sour. Apple is getting bruised in China as officials there promote competitors instead. The company has taken such a hit in sales that Apple is no longer the world’s largest cellphone seller. Apple lost the spot to Samsung the first quarter of 2024. 

Which brings up another point to India’s appeal: 1.4 billion people. When it comes to having money to spend, India’s middle class as a share of the total population is relatively small, but it’s expected to double to 61% by 2047. 

“It’s a wonderful base for customers,” Kapadia said. “So doesn’t matter if you’re Tesla or you’re Lego, you’re going to look at India not as just a place to do business and get supply, you’re going to look at it as a place to sell products. And I think that’s what’s really driving a lot of attention.”

Investors polled by Bloomberg resoundingly chose India as the most compelling investment case over the next 12 months when compared with Japan and China. 

India’s labor force lags

India may have more people than China, but its labor force has yet to catch up. On the one hand, more than half of India’s population is under 30 years old while China is dealing with an aging labor force. On the other hand, labor force participation is dramatically uneven. China’s is around 76% compared with India’s 51%. That’s driven largely by the lack of female labor participation in India. 

“They are lower than in some of India’s Muslim neighbors and much less developed neighboring countries,” Hermann said.

According to Hermann’s research, the labor force participation rate for working-age females in India is under 25%, lower than in Pakistan and Bangladesh. China is at 71%. But Hermann said participation is just one part of the challenge.

“Because of this lack of a bigger manufacturing sector that could provide jobs for lower-skilled jobs and India having pursued a very different development story than the neighboring countries, there is just a lack of opportunity also for people to move out of agriculture and into potentially high productivity manufacturing, let alone services sector,” Hermann explained.

About half of India’s labor force works in agriculture. To grow into a meaningful alternative to China, Indian workers will need to move from farm to factory. 

“I don’t think India will be able to upskill on their own,” Kapadia said. “It’s going to take foreign direct investment. It’s going to take the commitment of large multinational corporations to say, ‘Hey, we’re going to come in and we’re going to teach you how we do these things.'”

Labor reforms, other policies stall India’s progress

As a six-week election process sweeps through India, Prime Minister Narendra Modi is widely expected to secure a third five-year term when results are announced on June 4. During Modi’s decade in charge, bilateral trade between the U.S. and India has doubled to around $200 billion a year. The U.S. is now India’s largest trading partner. 

For India to step into an even bigger global role, experts say it will need to ditch its protectionist attitude, where high tariffs meant to restrict imports are blocking foreign interest. 

“What we do hear is that it is very difficult to set up shop in India if you can’t procure everything from within the country, which you just can’t given the relatively small manufacturing sector,” Hermann said.

Land acquisition is another challenge businesses cite, along with labor reforms. Parliament passed labor reforms in 2020 that would make hiring and firing easier. But labor union pushback has so far prevented the government from implementing those changes. Modi’s party has indicated cementing those will be a priority in a third term. 

“We have seen strong reforms already over the past 10 years and it’s taken a while to start to pick up so the question is, how quickly will the more recent reforms and potentially the future reforms actually bear fruit?” Hermann said. “But overall, the signs are positive.”

There’s little doubt which direction India is trending. Wells Fargo flagged the country as having the potential to outperform its already high growth expectations this year. But the landscape still needs a lot of fertilizer to make conditions ripe for the highest output, and it’s not the only country vying for status as a China alternative. 

“Vietnam has demonstrated its ability to get into electronic machinery, footwear, apparel, all plastics, all kinds of industries that India wants to be a part of but that India hasn’t really proved itself in,” Kapadia said. “If you think about the United States with the China+1 strategy, that plus one could just be Vietnam, why would it be India?”

Vietnam may have a running head start, but India’s ambitious growth target and huge consumer base are turning heads.