In April 2023, the United Nations declared that India had officially surpassed China in total population, making it the world's most populous country. This milestone has captured global attention, directing a spotlight onto India's market potential.
On July 28, 2023, Arvind Panagariya, a preeminent Indian economic expert and professor at Columbia University, wrote "How India's Economy Will Surpass that of the U.S.," on the Time Magazine website, which delved into the prospects of India's economy outpacing that of the U.S. Despite the U.S.'s current status as the largest global economy, Panagariya posited that even if it were to be overtaken by China in the future, it could still maintain its second position worldwide. This prompts the question: is it now the time to contemplate the possibility of India's economy eclipsing that of the U.S. on the international business stage?
Panagariya noted that during the 15-year period preceding the outbreak of COVID-19, India's real GDP growth rate remained approximately 8%, while the U.S. experienced growth of less than 2%. Should India be able to maintain this momentum over the upcoming two decades and subsequently uphold a 5% economic growth rate, with the U.S. consistently holding a 2% growth rate, Panagariya believes that both of these scenarios are feasible. Consequently, he envisions that by the year 2073, India's economy could exceed that of the U.S.
In alignment with this viewpoint, Goldman Sachs published a global economic outlook report titled "The Path to 2075" in December 2022. This report forecasts that India's economy is poised to outstrip that of the U.S. by 2075.
Goldman Sachs highlights that the anticipated real global economic growth rate for the period from 2024 to 2029 is 2.8%. Subsequently, the CAGR for each successive decade is expected to gradually diminish, reaching 2.5% from 2030 to 2039, and further declining to 1.7% from 2070 to 2079. This pattern is primarily attributed to the deceleration of workforce growth momentum, particularly given that by the year 2075, the global population is projected to approach stagnation.
The prospect of India assuming a more prominent role as an economic powerhouse in the future is rooted in its status as the world's most populous nation and the demographic dividend it presents.
However, both the Goldman Sachs report and Panagariya's article jointly underscore that the propeller of India's economic growth rests upon its labor force participation rate and labor productivity. The former necessitates a larger workforce, with a particular emphasis on female labor. Statistical data reveals that merely one-fourth of Indian females aged 15 and above are active in the workforce, in contrast to over three-fifths in the U.S. and China, both of which demand a greater share of skilled labor.
Consequently, a question arises: while expanding the labor supply and enhancing labor skills represent enhancements on the supply side of the labor equation, what about the demand side? Who will be the entities engaging and employing this expanding workforce?
Indian Prime Minister Narendra Modi (Source: AFP)
In 2014, during his initial term, Indian Prime Minister Narendra Modi unveiled the "Make In India" policy, aimed at increasing the manufacturing sector's growth rate to 12–14 % per annum, generating 100 million new job opportunities by 2022, and elevating the manufacturing sector's GDP contribution to 25% by 2025.
In Modi's subsequent tenure, he introduced the "Self Reliant India" policy, with a dual focus: fortifying local production and streamlining the upstream industries to attain self-sufficiency in supply chains. Simultaneously, efforts were exerted to enhance global competitiveness, stimulate exports, and propel 14 Production-Linked Incentive (PLI) initiatives, entailing substantial subsidies to drive indigenous development in key sectors.
According to data released by the Indian government in May 2023 for the fiscal year 2022, the manufacturing sector's value added to GDP currently stands at 14.7% (at prevailing prices), leaving a 10 percentage point discrepancy from the 25% target by 2025. Consequently, attaining this objective by the designated time frame appears improbable. Although Indian exports, as a percentage of GDP, progressed from 18.7% to 23.1% between the fiscal years 2020 and 2022, noteworthy advancement has been made. However, the import-to-GDP ratio also escalated from 21.0% to 26%, culminating in an estimated trade deficit of around $50 billion USD.
Nevertheless, the Indian government's resolute commitment to fortify local supply chains should not be underestimated. Recent unanticipated measures regulating PC imports exemplify this determination. Analyzing the 2021 customs 6-digit HS Code, PCs emerged as the eighth highest contributor to India's trade deficit among the top 10 products, surpassing mobile phone components at the ninth spot.
The bold actions taken by India reflect a deliberate focus on localized decision-making. The recent declaration by Micron regarding the establishment of an assembly and testing facility, Foxconn's substantial $600 million investment, and the persistent growth in India's mobile phone exports all signify the ongoing escalation of momentum in industrial advancement.
In the initial sections of his article, Panagariya makes reference to the research discoveries of the late global economic historian, Angus Maddison, articulating:
"India was the world's largest economy for a staggering one and a half millennia. China surpassed India by 1820 but they remained the world's two largest economies until 1870, when the twin effects of the Industrial Revolution in the West and European colonization were more fully felt. Britain then emerged as the world's foremost economic power; that economic title passed to the U.S. by 1900. Yet amid increasing talk of Asia's rise, is the world economy now poised to return to its old normal?"
The prospect of India outpacing the U.S. in the next 50 years might appear distant for current corporate decision assessments. Nonetheless, numerous economic think tanks and research institutes in the U.S. have frequently forecasted that India's ascent to the position of the world's third-largest economy would only materialize after 2030. However, the most recent projection from the IMF in April 2023 suggests that India is on track to surpass both Germany (currently fourth) and Japan (currently third) by 2027-2028, achieving this significant milestone ahead of schedule. Consequently, the upcoming market and industrial advancements in India warrant heightened attention from businesses!
