China is slowing down, and Western governments increasingly see it as a rival rather than an economic partner. Along its southwest border, another booming economy is vying to become the next engine of global growth.
The Indian stock market is booming, foreign investments are pouring in, and governments are lining up to sign new trade deals with a young market of 1.4 billion people. Aircraft manufacturers are receiving record orders, Apple is ramping up iPhone production, and suppliers who have long clustered around the manufacturing corridors of southern China are following suit.
Despite all this optimism, India’s $3.5 trillion economy remains overshadowed by the $17.8 trillion giant that is China, and economists estimate it would take a lifetime to catch up. Poor infrastructure, unequal education, bureaucratic red tape, and a lack of skilled workers are just some of the many hurdles Western companies face when setting up in India.
Yet analysts believe that India could become the world’s most significant contributor to growth over the next term of Prime Minister Narendra Modi. He is expected to win the upcoming elections scheduled in a few weeks.
To achieve this, Modi will have to meet ambitious goals in four crucial areas of development:
- Building better infrastructure;
- Increasing skills and labour force participation;
- Constructing better cities to house all these workers;
- Attracting more factories to provide them with jobs.
Following reforms in the late 1970s that opened its economy to the world, China’s growth averaged 10% annually for three decades. This made it a magnet for foreign capital and gave it greater influence on the global stage. Every major global company had to have a China strategy.
Can Modi’s government do the same? The Prime Minister has made accelerating India’s economy a major element of his electoral platform, pledging to propel the country’s economy to the top globally if he wins a third term.
Government allocation to infrastructure has more than tripled from five years ago to over $132 billion for the fiscal year 2025, a figure that could further accelerate. However, Modi will need to invest more in improving railways, roads, ports, waterways, and other critical infrastructure over the next six years until 2030.
At the same time, his government has sought to curb inflation by banning wheat and rice exports. Earlier this decade, the government introduced incentive programs totalling around 2.7 trillion rupees to encourage domestic manufacturing, with companies receiving tax breaks, reduced land rates, and capital to set up factories in India from the states. While the effort is commendable, it still falls short of the needs.
In a recent interview, India’s Chief Economic Advisor, V. Anantha Nageswaran, cautioned against comparing India with China, given the much larger size of its economy. However, she noted that India’s growth potential, younger population, infrastructure development, and the possibility of expanding its middle class to 800 million people present a clear value proposition for foreign investors.
India’s high growth expectations are materializing in some sectors, such as aviation. Last year, IndiGo, the country’s largest airline, and Air India signed record contracts for 970 aircraft with Airbus and Boeing. The new Indian airline, Akasa, also ordered 150 planes from Boeing earlier this year.
The combination of new airports, a range of aerospace startups, and increasing domestic travel demand from a rising middle class drives aircraft demand.
Economists view new infrastructure as a critical ingredient for faster development. Airports illustrate the catch-up growth potential: India had about 148 airports last year, lagging over 100 behind China, and aims to increase this number to 220 by next year.
Infrastructure spending is crucial for rapid development. It creates jobs and serves as a growth multiplier by reducing logistics costs, facilitating trade, and encouraging businesses to set up once transport links are established.
Expanding India’s manufacturing capacity is also essential to boost growth. The services sector does not create enough jobs and generally recruits from the educated workforce. In contrast, the manufacturing sector relies more on many less skilled workers, a critical strength that helped propel the Chinese economy and put its massive workforce to work.
The manufacturing industry is how India could transition low-skilled workers out of the agricultural sector and into employment. It is a remake of the English Industrial Revolution. Some 48.6 million moderately skilled workers will retire in China and advanced economies between 2020 and 2040. During the same period, India will welcome an additional 38.7 million workers.
India stands out as the only country with a population large enough to offset the retirement of factory workers from advanced economies and China.
Modi has sought to attract manufacturers with hefty incentives such as tax cuts, discounts, and capital support. The strategy has quickly gained success, with companies like Apple and Samsung accelerating their production in India.
However, they often assemble phones from parts made in China rather than building them on-site. Earlier this year, India reduced tariffs on several mobile device components to boost production and make its exports competitive. Industries such as textiles, leather, and engineering goods have also advocated reduced import duties.
Despite years of efforts to boost manufacturing, it still accounted for only about 15.8% of India’s GDP in 2023, compared to 26.4% in China, according to the latest national statistics. Even though India’s manufacturing sector has been steadily growing three percentage points higher than overall growth, the country will only achieve Modi’s goal of a 25% share of the manufacturing sector after 2040.
One of the major obstacles for India is labour market participation or the share of the population of working age or seeking employment. According to the International Labour Organization, India has one of the lowest rates in the world, at 55.4% in 2022, compared to 76% in China. For women, the figure is even lower: less than a third of Indian women of working age participate in the labour force.
India must first make its workforce more employable.
While the country boasts some of the brightest minds and top institutes rivalling the best universities, the country’s overall average still lags far behind those of the region’s economies.
Next, there is the need to house all these workers who are leaving rural areas for cities. Only 36% of the Indian population lives in cities, compared to 64% in China, and decades of urbanization will be needed to bridge this gap.
Many advancements have already been made regarding interconnectivity for cities, expanding the railway network, and better airport infrastructure. However, critical issues like water, traffic, and housing still need to be solved.
India has always been the eternal hope of the world, but it has been unable to realize its potential. A new geopolitical landscape gives India a new advantage, yet it is troubled by Modi’s government’s nationalist and sectarian policy, which plays on the religious disparities of a country that houses the largest Muslim community in the world. Another question is the succession of a prime minister who will be 74 years old at the beginning of a potential third term.