Can India seize its opportunity to rival China's economy?

• India’s fast-growing economy is attracting positive interest from overseas investors, translating into a rise in net inflows of foreign direct investment
• India is well-placed to benefit if Western companies feel it prudent to diversify their supply chains away from China
• The question remains whether India is poised or even capable of seizing the opportunities presented?

A “huge opportunity” is how Apple CEO Tim Cook described India, after meeting the country’s Prime Minister Narendra Modi at the White House last year^[1].  It was more than empty praise. Apple and numerous other tech companies have increased their investment in India in recent years.

It comes as no secret that Prime Minister Modi would like India to rival or even replace China as a powerhouse in the global market, spanning manufacturing to financial investment, positioning the country as a key driver of the global economy. 

Such a prospect is a long way off, though recent developments have been promising. Hefty net inflows of foreign money have helped to create China’s economic miracle; while today, a combative China looks less attractive a place for investment, with further international capital diverted to India. Data from the World Bank show that FDI inflows into India have risen to levels similar to the FDI flowing into China, as a proportion of domestic GDP.

China’s GDP is of course still much larger than India’s; but India’s pace of GDP growth is now outstripping China’s. Tim Cook cited India’s fast-growing economy and its “very large, young and tech-savvy population” as key reasons to be enthused about the country. This tech savvy is reflected in another factor that foreign investors find attractive: India’s relative specialism in IT services. As chart 2 shows, these consistently account for almost half its total service exports — far higher than other countries that have recently succeeded in graduating to high income status as defined by the World Bank. In China, IT service exports only exceeded 10% for the first time in 2015.

Of course, although a globally competitive services sector offers scope for high-pay, high-productivity employment, India remains a low-middle income country and it is unlikely that IT services will be sufficient on their own to drive its economic development. The IT sector is not labour-intensive, and some of India’s comparative specialisms appear vulnerable to automation and AI.

Nonetheless, Fathom analysis of timely LSEG data, accessed via Eikon, suggest things may be changing. In 2022, foreign acquisitions of Indian-owned firms made up 3.7% of global M&A activity by number of deals, compared to 2.2% for Chinese-owned firms – with a growing number in the computers and electronics sector. This is the first time India has outperformed China on this measure since our analysis began. Some may argue that this reflected the zero-COVID policy that Beijing was implementing at the time, but recent trends from 2023 do not suggest a reversal. Instead, they offer strong evidence of global confidence in India’s outlook. To some extent this confidence could become self-fulfilling, as the acquiror transfers knowledge and money to its new subsidiaries, raising productivity as a result.

If India’s economic growth continues to outpace the global average its share of global GDP will continue to rise, and so too should its share of global stock-market capitalisation, opening it up to further opportunities for domestic companies. However, India’s ascent is far from certain yet. It will have to harness the opportunities presented by this positive investor sentiment effectively if it is to reach its full potential. It is worth noting that in the eight years after Prime Minister Modi launched his flagship ‘Make in India’ strategy in 2014, to drive up manufacturing as a share of the economy, manufacturing fell from 15.1% to 13.3% of India’s GDP. In China’s much larger economy, the ratio was 28%. Red tape, protectionist trade tariffs, an economy still heavily reliant on agriculture and the fact that only 25% of Indian women are currently economically active, compared to 71% in China, constitute significant obstacles that are holding India back. It will need further change to overcome the challenges ahead.

The issues raised in this blog, and many more, are explored at greater length in the Incredible India research paper.

1. Apple's Tim Cook and tech execs meet Indian Prime Minister Modi (cnbc.com)