India’s presidency of the G20 placed a spotlight on India with it emerging as a leader of the Global South by securing a permanent seat for the African Union in the G20 and emphasising investments from developed to developing countries to ensure sustainable development. And this came on the heels of it demonstrating its technological capabilities last month by achieving the world’s first successful landing on the south side of the moon.
Bridgewater’s founder, Ray Dalio, a legendary investor, recently said, “I think India is where China was in 1984… I think Modi is a Deng Xiaoping. So you have massive reform, development, creativity, all those elements.” In an otherwise recessionary world, India represents a rare bright spot, as it is expected to ascend to become the third largest economy globally and an upper middle-income country by the end of this decade. Longer-term projections place India on a path to becoming a high-income economy and the largest economy in the world by the end of this century1.
For this to be a reality, India’s growth would be need to be powered by a combination of fundamental drivers which collectively address the structural challenges it has historically faced. Its favourable demographics would need to be supported by increasing participation and formalisation in its labour force as it becomes more educated. Its capital base and investment capabilities would need to be supported by a stronger balance sheet and growing international investment. And its productivity growth would need to be underpinned by rapidly improving physical and digital infrastructure.
If realised, this trajectory and scale of growth would be nearly unprecedented, mirrored only by China’s rapid ascendance to the world stage over the last two to three decades. And just as China’s rapid growth in the last 15 years – as it scaled from US$3 trillion to US$15 trillion in GDP – had profound implications for the country and the world, so too would India’s economic rise as it scales into a truly global economic and geopolitical superpower. India’s rise will go beyond just economic scale and shareholder value creation, it will have profound implications for global business, geopolitics and global sustainability objectives.
The May 2023 Sign of the Times2 looked at the dimensions of India’s rise and the implications for investors in a series of charts, concluding that India’s growth can create an incremental US$20-50 trillion of shareholder value by 2050, and it therefore needs to be a critical piece of any global asset allocation strategy. This month’s Sign looks at the fundamental underlying drivers powering India’s growth, and the global implications of its rise.
The G20 as a Turning Point
India’s G20 presidency concluded with the G20 Summit earlier this month in New Delhi where, under the tagline “One Earth, One Family”, India was able to able to serve as bridge between major powers, for example by getting a permanent seat for the African Union, and negotiating a joint statement by all members which emphasised the need for respecting national sovereignty, global economic cooperation, and commitments for climate finance to meet global sustainability objectives. India’s pivotal role in the summit was reflected in the plaudits from leaders from across the world, many of whom are at odds with each other.
Furthermore, the summit happened in the backdrop of a series of remarkable achievements for India since the beginning of this year, both domestically and on the world stage (see inset).
The question for India now is whether it can capitalise on this momentum to accelerate its own economic and geopolitical transformation.
India’s Fundamental Drivers: Demographics, Capital and Productivity
From an economic perspective, India faces many of the same challenges it has almost always faced, many of which are in common with other countries: high interest rates, a poor monsoon, high post-pandemic growth albeit from a low base, declining consumer pandemic savings following the pandemic, high oil prices at c.US$90 per barrel, a persistently high dependency on imported oil and gas, amonst others. Added to this are a mix of social and community issues that have seen killings in northern India between rival villagers, church burnings and ethnic violence in Northeast India, and unease among India’s c.200 million Muslims.
Yet the mood in India is jubilant as it heads into a general election, scheduled for May 2024 (however with rumours that it may be called sooner, possibly before the end of the year. And Prime Minister Modi is seen by many as a man who has engineered this jubilation with a series of wins on the domestic front, with over 500 million more Indians entering the financial system with a bank account, digital payments, and increasingly broader financial inclusion. On the international front, India has been in the spotlight with world leaders coming to New Delhi for the G20 Summit, and on the science and technology front, it has successfully landed on the moon and launched a mission to study the sun. Recent surveys have indicated that 79% of Indians have a favourable view of PM Modi , which is c.36% higher than his own BJP’s expected vote share, and c.39% higher than the opposition alliance’s expected vote share4.
Whether this jubilation can not only deliver a win at the next election for its architect, but also a longer term win for India depends on whether India can deliver economic growth in a reliable manner.
To deliver this, India will need to leverage its unique assets such as its demographics, population scale and democracy, and turn them into drivers of value creation through: (i) a system of enterprise and employment supporting one of the world’s largest banks of entrepreneurs and a large, growing, increasingly formalised and educated workforce; (ii) capital formation at huge scale from its trading, savings and investments; and (iii) productivity growth from creating a robust physical and digital infrastructure that can support the activities of 1.4 billion people rising to 1.6 billion by 2050, and the foreign trade that will come with it.
The underlying drivers powering these three critical input factors, which drive any economy’s growth potential, are examined below.
System of Enterprise and Employment: A Nation of Entrepreneurs, and An Increasingly Educated Workforce,
Potential from Increasing Labour Force Participation and Formalisation. To date, India has not fully utilised its demographic advantage due to low labour force participation, particularly amongst women, and a large “informal” economy which is less productive than the formal one. Less than half of India’s working-age population (49% as of 20225) currently participates in the workforce, and participation amongst working-age women is even lower at 24%6. Further, of the c.440 million people actively working or looking for work, c.7% are unemployed, and three out of four workers are “informal” or self-employed workers with no written contract, paid leave or other benefits7. Effectively, India’s economy currently is being driven by c.100 million salaried individuals, and c.300 million self-employed indviduals running their small businesses including corner shops, pharmacies, local restaurants, gig workers, agricultural workers and labourers.
Thus, the growth of the working-age population captures only one dimension of India’s demographics. Increasing participation and formalisation, as families become more and more nuclear and multiple individuals in a household seek salaried jobs, has the potential to drive India’s labour force growth significantly in excess of working-age population growth, as levels of participation gradually catch up to those of other major economies.
Investments in Human Capital Could Bear Fruit in the Coming Decades. Increasing participation in and formalisation of the labour force would need to be driven by increasing levels of education in the adult population. Higher levels of education have been driving the shift away from agriculture and informal employment towards services and industry, and this would need to accelerate in the coming decades as the number of Indian adults that have completed their schooling and some level of college is expected to double from 0.4 billion currently, to 0.8 billion by 2050 and 1.1 billion by the end of this century.
As the numbers of Indians with a complete education grows, so too will the size of the labour pool of people qualified for higher productivity jobs in industry and services. Continued investments in human capital – capex to upgrade the country’s school and college infrastructure, the leveraging of digital education tools, and better vocational training to expand access to a higher quality of education – has the potential to further accelerate this transition to a scaled and highly-educated knowledge economy.
Capital: A Strengthening Domestic Balance Sheet, Increasing International Investment
A Stronger Balance Driving Macroeconomic Stability. Over the last decade, with a growing economy and robust trade, India’s foreign exchange reserves have doubled from c.US$300 billion to c.US$600 billion currently, giving the government and the Reserve Bank of India significant ammunition to manage its currency, and handle external and internal macro and liquidity shocks.
At the same time India’s current account deficit has narrowed significantly over the last decade, from a trough of c.5% of GDP to c.2% of GDP currently, on the back of an improved trade deficit, supported by growing services exports (which in turn are underpinned by India’s technology services industry). Together with improved foreign exchange reserves, this makes India more resilient to external shocks, and provides it the ability to drive the investments it needs for growth.
Increasing International Investment with Long-Term Strategic Investments. Foreign direct investment (FDI) is critical for India as it does not have the same level of domestic savings and investment as China did to power rapid and sustained growth. Fortunately for India, as it has liberalised its economy over multiple governments, FDI has grown significantly faster than the economy.
Total FDI inflows into the country have increased from c.US$5 billion during the Atal Bihari Vajpayee led government to an average of US$30 billion annually during the Manmohan Singh led governments from 2004-2014, to an average of US$66 billion annually during the nine years of the current Narendra Modi led governments.
Over the last few years in particular, key pools of international capital – for example from the Middle East, Canada and Japan – have stepped up their investments and started making scaled and long-term strategic investments in the country across key sectors. As these pools of capital, and others from the US, Europe and Australia scale their exposure, India is getting the long-term financial capital that it needs to drive significant capital deepening and growth.
Productivity: Improved Digital and Physical Infrastructure to Drive Demand Growth and Innovation
Digital Infrastructure is Unleashing Revolutions in Finance and Other Sectors. India has also now created widespread high-speed mobile internet networks with c.1.2 billion internet users in 2023, a unique biometric based identity for every Indian citizen, and increased bank account penetration amongst adults from 50% in 2014 to 80% currently through PM Modi’s flagship financial inclusion scheme.
These have become the building blocks for a unique set of digital public goods – known as the “India Stack” – which have already unleashed a revolution in financial inclusion13, with over half a billion Indians coming into the financial system in the last few years, and digital payments growing rapidly to c.US$200 billion per month (as of March). The Stack is now being further augmented to support other use cases in education and healthcare, creating a set of tools on top of which entrepreneurs can build disruptive businesses that address India’s core inclusion challenges in finance, health and education.
A Massive Upgrade to India’s Transport Infrastructure is Underway. Increasing global strategic investment in India, combined with a significant ramp up in the government’s capital expenditure, is allowing India to rapidly upgrade its inadequate physical infrastructure. Over the last decade, government investment in roads and railways alone has increased from c.0.5% to 1.7% of GDP, and a number of mega-projects have progressed and are expected to come onstream in the coming years, with the potential to have a significant impact in easing supply chain bottlenecks and inefficiencies.
Given India’s historical ‘infrastructure deficit’, these mega-projects, such as a dedicated freight corridor between Delhi and Mumbai, has the potential to significantly increase productivity of Indian enterprises. For example, the average speed of trucks on India’s highways is currently c.20 kilometers per hour. A new Delhi-Mumbai freight corridor (which includes an expressway as well as high-speed rail) has the potential to more than double this, bringing it closer to China’s.
The ‘Indian Century’: The Global Implications of India’s Rise
The combination of the factors outlined above have given India the fundamental drivers it needs to drive rapid and sustained growth over the coming decades, addressing perennial structural issues which the country faced historically. As a result of these India is expected to scale to the third largest economy globally before the end of the decade with a GDP of US$7-8 trillion by 2030. By 2050, India is expected to be a c.US$30-50 trillion economy in nominal terms16 , and if it did, it would overtake the entire European Union’s economy at the time. On this trajectory, by the second half century, India would ascend to a high-income country and be on track to overtake the US economy by 2075 and the Chinese economy by the end of the century. It is also worth noting that China is projected to be the largest economy in the world within the next 15 years.
Outside of China’s own rise, this sort of rapid economic ascendance is difficult to fathom, and will have a number of implications for both India and the world, some of which are difficult to predict today. Amongst these, three key implications of India’s rise are examined below:
I. Implication for Global Businesses: Re-Shapes Supply and Demand Across Key Sectors
Just as China’s economic ascent led to the reshaping of supply and demand dynamics across key sectors globally, India’s own rise would likely have a similar effect. The primary difference with China however is that India’s economy is powered by domestic consumption and services, whereas China’s was powered largely by exports and industry.
Therefore, while China’s rise had a dramatic impact on global commodities and supply chains, India’s rise is likely to be more broad-based, and will have implications across several key services sectors including financial services (where Indian banks will achieve global scale), healthcare (where India is already a leader in pharmaceuticals), technology (where the country accounts for the majority of global IT services exports), and others.
II. Implications for Global Geopolitics: Reshapes the Global Order
As India’s G20 presidency this year demonstrated, India’s economic rise will invariably lead to growing geopolitical influence. Given its democratic nature, the nature of India’s rise is likely to be different from China’s. Western countries are already looking at India as a potential counter-weight to an increasingly assertive, but also isolated, China; which will lead to a strengthening of alliances with other democratic partners, as is already evident in the Quad Dialogue between the US, Japan, Australia and India.
Given these factors, India will likely find itself in a unique position as a potential bridge between developed countries and the Global South (including most notably Africa) to help drive investment flows to these countries and regions, as well as a potential bridge between the West and its adversaries such as Russia and Iran who are also likely to continue to court India.
India’s post-Independence multilateral approach which sought to maintain neutrality will come under some strain no doubt, but thus far it has held strong, with India balancing the shift to the West with initiatives that strengthen its ties to other countries and regions, for example the inclusion of the African Union as a permanent member of the G20), and the expansion of the BRICS bloc announced in South Africa last month where India worked with Brazil, Russia, China and South Africa to expand membership into more of Africa and the Middle East.
III. Implications for Global Sustainability: Whether the World to Meet its Carbon Objectives
Unlike China, India will unfortunately not have the luxury of scaling its economy in a carbon-intensive manner, given that it will suffer disproportionately from the most catastrophic consequences of climate change. At the same time, if the world does not ensure that India grows in a carbon-neutral manner, given its population and potential energy requirements, it will be near impossible for the world to meet its objective of net zero emissions by 2050.
The solution will likely lie in the developed world investing (both in terms of capital and technical know-how) in India’s green growth, and in India ensuring that it lays out the policy and implementation frameworks to ensure that it decarbonises, electrifies and achieves better energy efficiency simultaneously.
Conclusion: India’s Rise Will Require it to Manage Global and Domestic Stakeholders
India’s rise is not a temporal phenomena, it is being driven by a combination of factors which are together addressing structural issues which have hitherto held it back. India’s rise could potentially create the world’s largest economy by the end of this century and a geopolitical superpower.
However, as history suggests, economic ascendance of this scale would likely lead to a number of major global implications, which in turn will impact the speed and extent of India’s rise. For example, the rise of Indian sectors and companies may eventually be seen as a competitive threat, inviting protectionism and competitive actions. If its growth is carbon intensive, it would have a devastating impact on climate change, from which India already stands to suffer disproportionately for geographic reasons. And as it becomes increasingly assertive geopolitically, more countries will likely come to see it as a threat or potential adversary, leading to various conflicts.
Domestically too, India’s rise is unlikely to be a straight line. Ethnic violence this year in the north and northeast regions of the country, and the growing feelings of alienation among India’s large Muslim population, need to be carefully managed if they are not become a roadblock to stability and progress. Ultimately, India’s successful ascendancy may well depend on its ability to drive political, social and economic inclusion and harmony across a diverse and heterogenous population, avoiding civil conflict and ensuring no one gets left behind.
Previous economic empires scaled on the basis of carbon-intensive industrial growth, and created conflict with incumbent superpowers. India will not have this luxury. India has the chance to be the first truly scaled economy of the Information Age. It also has the added challenge or opportunity to show this is possible to do in a “green” manner by transitioning away from fossil fuels. It will need to do so peacefully while managing a border issue with neighbouring China, and another neighbour Pakistan descending further into a failed state. And this has to be achieved in an inclusive manner to prevent civil conflict and ensure social stability. This is no easy task, even in mature rich democracies, as America’s own civil divide shows.
If it manages to do this, India may also provide a bridge between the industrial and information eras, and as a partner of the West and the Global South.
The Leader: Endnotes
Source: Goldman Sachs Global Investment Research
Please see Sign Leader from May 2023, India’s US$50 Trillion Value Creation Opportunity
Source: Pew Research Center survey, August 2023
Source: Times Now-ETG Opinion Poll, August 2023
Source: World Bank Database (Based on International Labour Organisation estimates)
Source: International Labour Organisation (ILO)
GPC analysis based on data from various sources including World Bank, International Labour Organisation, CEIC
Source: Wittgenstein Centre for Demography and Global Human Capital (WIC)
Source: Reserve Bank of India
Source: Quarterly FDI Statistics from Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India
Source: Venture Intelligence
Please see Sign Leader from September 2022, Technology as the Enabler of Systemic Financial Revolution, which analyses the current India Stack and the potential impact of the additions to it currently underway
Sources: www.indiastack.org; World Bank Development Indicators database; National Payments Council of India
Sources: Center for Monitoring the Indian Economy (CMIE), The Economist, Various news reports
Please refer to Sign Leader from May 2023, India’s US$50 Trillion Value Creation Opportunity
Source: Goldman Sachs Global Investment Research
Sources: Various industry reports and news articles
Sources: Asia Society Policy Institute, “Getting India to Net Zero”, Modelling by Cambridge Econometrics