China is slowing and Western governments increasingly see it as a rival rather than an economic partner. On its southwestern border, another rising economy is vying to take its place as the world’s next growth driver.
India’s stock market is booming, foreign investment is flooding in and governments are lining up to sign new trade deals with the youthful market of 1.4 billion people. Aircraft makers like Boeing Inc. are taking record orders, Apple Inc. is scaling up iPhone production, and suppliers that have long clustered around manufacturing corridors of southern China are following.
For all the optimism, India’s $3.5 trillion economy is still dwarfed by the $17.8 trillion behemoth that is China and economists say it would take a lifetime to catch up. Shoddy roads, patchy education, red tape and a lack of skilled workers are just a few of the many deficiencies western companies run into when setting up shop.
But there’s one important measure where India could overtake its northern neighbor far more quickly: As the engine of global economic growth. Bullish investment banks, such as Barclays, believe that India can become the world’s largest contributor to growth within Prime Minister Narendra Modi’s next term. His party is widely expected to win elections set to begin in weeks.
Exclusive analysis by Bloomberg Economics is even more optimistic, finding that India can reach that milestone by 2028 on a purchasing power parity basis. To get there, Modi will need to hit ambitious goals in four crucial development areas — building better infrastructure, expanding the skills and participation of the workforce, building better cities to house all those workers, and luring more factories to provide them jobs.
There is a template. Following reforms in the late 1970s that opened its economy to the world, China’s growth averaged 10% a year for three decades. That made it a magnet for foreign capital and gave it greater clout on the world stage. Every big global company had to have a China strategy.
But the so-called ‘miracle’ phase of China’s expansion is now in the past as a property crisis intersects with growing Western concerns over its dominance of supply chains and advances in sensitive technologies.
That’s where India comes in. Modi’s government is seeking to make the Indian economy more competitive, a shift that’s appealing to Western businesses looking to diversify away from China in search of a deep well of cheap labor. Modi has made India’s accelerating economy a major part of his election pitch, pledging at a rally last year to lift the country’s economy “to the top position in the world” should he win a third term.
The government’s allocation to infrastructure has more than tripled from five years ago to above 11 trillion rupees ($132 billion) for the 2025 fiscal year, a figure that could exceed 20 trillion rupees if states’ spending is thrown in. Modi is projected to invest 143 trillion rupees to improve rail, roads, ports, waterways and other crucial infrastructure in the six years through 2030.
At the same time, his government has sought to tamp down inflation by banning exports of wheat and rice. Earlier this decade, the government rolled out incentive programs of some 2.7 trillion rupees to encourage domestic manufacturing, with companies getting tax breaks, lower land rates, and capital to set up factories in India from states as well.
In Bloomberg Economics’s base case scenario, India’s economy will accelerate to 9% by the end of the decade, while China slows to 3.5%. That puts India on course to overtake China as the world’s biggest growth driver by 2028. Even in the most pessimistic scenario — in line with the IMF’s projections for the next five years in which growth stays below 6.5% — India overtakes China’s contribution in 2037.
Of course, all forecasting by definition relies on incomplete information. Black swan events or an economic shock can throw any forecast out the window.
In a recent interview, India’s Chief Economic Adviser V. Anantha Nageswaran cautioned against making comparisons with China given the size of its economy is much larger. But he noted that India’s growth potential, its younger population, infrastructure buildout and the potential to expand its middle class to as many as 800 million people represents a clear value proposition for foreign investors.
“That is the biggest draw,” he said. “It’s not just cost competitiveness, it’s also the marketplace, the ability to generate economic returns, the rule of law and the stability of policies with respect to international investors being able to repatriate your money relatively easily.”
In some sectors — such as aviation — there is evidence that India’s lofty growth expectations might just pan out.
Last year, IndiGo, the country’s biggest airline, and Air India Ltd. placed record deals for 970 aircraft with Airbus SE. and Boeing. India’s newest airline, Akasa, also ordered 150 jets from Boeing earlier this year.
Salil Gupte, president of Boeing India, said a combination of new airports, an array of aviation startups and growing demand for domestic travel stemming from a rising middle class are fueling demand for planes.
“You see startup airlines that have grown faster than any other startups in the history of aviation coming up in India over the last year,” he said. “All of those factors drive a significant civil aviation market opportunity.”
The U.S. company in January inaugurated a new engineering center in Bengaluru in southern India that will cost $200 million and be the company’s largest investment outside of the US when complete, coming on top of a pledge to spend $100 million on infrastructure and pilot training over the next two decades to meet the growing demand for pilots.
Economists point to new infrastructure as a key ingredient for faster development. Airports illustrate the potential for catch up growth: India last year had about 148 airports, lagging China by more than 100, and aims to boost the number to 220 by next year.
Infrastructure spending is critical for rapid development because it provides jobs and serves as a growth multiplier by cutting logistics costs, facilitating trade and encouraging businesses to set up shop once transport links have been made.
That’s what’s happening in Noida on the southeastern edge of the capital city New Delhi, where vast blocks of new electronics factories have sprung up, evoking the rapid expansion of the manufacturing districts of Shenzhen in southern China in prior decades.
Dixon Technologies Ltd., an Indian contract manufacturer, has broken ground on a 1 million square-foot mobile-phone assembly plant on a plot of land rimmed by orchards and wide highways in Noida’s south. On a recent visit, more than 200 hard-hatted workers were on site tearing up the earth and laying the foundation for the factory that will begin to churn out smartphones next year.
The company’s workforce has grown from around 9,000 before the pandemic to about 26,000 today, explains Sunil Vachani, the chairman and co-founder. Vachani said Dixon is benefitting from a boom in new business from clients like Chinese smartphone maker Xiaomi Corp. and South Korea’s Samsung Electronics Co. wishing to use its factories to manufacture goods for India’s rising middle class.
“What we’re used to seeing in China is these large mega factories, where thousands of people are working on one campus and live on that campus,” said Vachani. “We are also trying to do that in India.”
Expanding India’s manufacturing capacity is critical to boosting growth. The service sector simply doesn’t create enough jobs and generally recruits from the educated labor pool, whereas the manufacturing sector relies more heavily on large numbers of less skilled workers — a key force that helped power China’s economy and put its massive labor force to work.
“We have this very large, surplus labor in agriculture that cannot tomorrow start writing code,” said Sabyasachi Kar, professor at the Institute of Economic Growth, a Delhi think tank. Manufacturing “is the process through which we have to bring these people out of the agriculture sector and into employment.”
Dixon’s Vachani said he has no problems recruiting workers for his factories from the nearby towns of Uttar Pradesh, the state where Noida is located. With about 200 million people, Uttar Pradesh is India’s most populous state and is known for its large agricultural economy and high unemployment rate.
“If you want to set up a factory employing 50,000 people, you can do that today,” he said. “You can get that manpower within a month, maximum.”
India stands out as the sole country with a population large enough to offset retiring factory workers in advanced economies and China. Bloomberg Economics estimates that some 48.6 million medium skilled workers — typically employed on the factory floor — will retire from China and advanced economies from 2020 to 2040. In the same period, India will add 38.7 million such workers.
Modi has sought to lure manufacturers with heavy incentives such as tax cuts, rebates and capital support. The strategy has had early success with firms like Apple and Samsung Electronics Co. ramping up production.
But they are often assembling phones from parts made in China, rather than building them from scratch. Earlier this year, India reduced tariffs on several mobile-device components to boost production and make its exports competitive. Industries including textiles, leather, and engineering goods have also made the case for lower import duties.
“There’s no doubt that we are still dependent on China,” says Vachani. “I think it’s moving in the right direction, but I think it’s still there.”
Despite years of efforts to boost manufacturing, it still only accounted for about 15.8% of India’s GDP output in 2023 compared with 26.4% in China, according to the latest national statistics. Even if India’s manufacturing sector consistently grows by three percentage points more than the headline growth, the country wouldn’t attain Modi’s goal of 25% share in manufacturing until 2040, according to Bloomberg Economics.
One major obstacle for India is labor force participation, or the share of the working-age population that’s actually working or looking for a job. India has one of the world’s lowest, at 55.4% in 2022, according to the International Labour Organization, compared with 76% in China. For women, the figure is lower still — less than a third of working-age Indian women participate in the workforce.
“We need all the jobs we can get,” said Raghuram Rajan, a former governor of India’s central bank who now teaches at the University of Chicago Booth School of Business. “I would make India an inviting place for manufacturers, domestic and foreign, to set up if they can.”
But first, India needs to make its workforce more employable.
“India has a lot of extremes. It has the brightest minds, and then the greatest institutes in India that compete with the Ivy League universities, but then on average human capital levels are just not quite comparable to most other countries in the region, let alone higher or more developed countries,” said Alexandra Hermann, lead economist for Asia macro at Oxford Economics Ltd.
Then there’s the need to house all those workers as they shift from rural areas to cities. Just 36% of India’s population live in cities versus 64% in China, with decades of urbanization needed to close that gap.
“India needs a lot more cities,” said Santanu Sengupta, India economist at Goldman Sachs Group Inc. in Mumbai. “There is a lot of progress already happening in terms of interconnectivity for the cities, in terms of more railway network, better infrastructure for airports and so forth. But there are crucial problems like water, like traffic, like our big housing that needs to be solved.”
If Indian policymakers can build more homes in better functioning cities and get more people trained and into the manufacturing sector, the country is ideally placed to cash in on the global search for the next China. But even then, it’ll have to contend with something China didn’t during its economic ascent — the existence of a massive rival that overwhelmingly dominates global supply chains.
Ashok Gupta, chairman of Optiemus Infracom Ltd., an electronics manufacturer based in Noida, said his company has been a beneficiary as sentiment toward China sours and foreign firms look to diversify their supply chains. The company last year announced a joint venture with Corning Inc., the US maker of glass for smartphone screens and other products, and the two are set to open a factory in southern India next year.
“The geopolitical situation, that is an opportunity for us,” he said. But he conceded that Indian manufacturers still have a long way to go to compete with Chinese rivals. For example, the factory with Corning will not actually be manufacturing smartphone glass, but instead will be importing it in sheets to finish and fashion into the final product, he said.
“In this industry, China is 20 years ahead,” he said. “We are only starting.”
Source：Bloomberg
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