Western leaders make a sensible gamble on India – 07/18/2023 – Martin Wolf

The enemy of my enemy is my friend. On that basis, the West’s closer relations with India make sense. Joe Biden’s warm embrace of formerly banned Narendra Modi, now his politically dominant prime minister, in Washington, and Emmanuel Macron’s equally warm embrace of the Indian leader in Paris, aim to forge a close relationship with a country expected to be a powerful counterweight to China.

Is this a good bet for Western powers? Yes. India is likely to be a rising great power. Interests also align. But the extent to which values ​​are shared is a more open question.

Where is India now and where can it go economically and politically?

Today, India has the fifth largest economy in the world at market prices and the third largest by purchasing power. Its population is 1.43 billion, about the same as China’s. By 2050, however, India’s population is predicted by the UN to reach 1.67 billion, against 1.31 billion in China.

India’s per capita GDP (in purchasing power) is close to 40% of China’s levels, according to the IMF. In 1990, India and China were almost equally poor, with GDP per capita, as measured by purchasing power, estimated at 4.6% and 4.1% of US levels, respectively.

With an economic performance that is certainly the most remarkable in world history, China’s GDP per capita reached 28% of US levels last year, against 11% for India. However, while China’s relative performance was incomparably better, India ranked second among the seven largest emerging economies.

China was an extreme example of the most successful development strategy of the modern era – high investment, rapid industrialization and progressive upgrading of manufacturing exports. This was also the way of Japan. India took a very different path.

Between 2014 and 2023, its average investment rate was just 31% of GDP, versus China’s 44%, and its national saving rate was 30%, versus China’s 45%. More surprisingly, manufacturing’s share of India’s GDP has been falling, not rising, as one would expect at this stage of its development. This share was 13% of GDP in 2022, against 28% for China. Although trade-to-GDP ratios (at market prices) have become roughly equal, China is now a much larger exporter to world markets.

What then might lie ahead?

Let’s start with the fundamentals. India’s gross savings rate, while not as high as China’s, is high enough, especially given the ability to import capital, to finance a growth rate of at least 5-6%.

India also has reasonable macroeconomic stability. Entrepreneurship is plentiful and the infrastructure is improving. India will definitely not suffer from labor shortages, on the contrary. As Professor Ashoka Mody notes in “India Is Broken” [a Índia está falida], the inability to generate enough good jobs is a big failure. Another is the failure to educate the population to a high standard: human capital is likely to prove a much tougher constraint than physical capital.

India is an obvious location for companies following the “China plus one” strategy. It also has the advantage over obvious competitors in a large domestic market. However, it has repeatedly failed to exploit opportunities for rapid growth in manufacturing exports over the past 75 years. Mistrust of free trade always gets in the way.

As with many other countries, India has suffered from a glut of bad debts since the global financial crisis in 2008. This “double balance sheet problem” has been a significant constraint on growth. But, argues this year’s Economic Survey, “over the past decade, India’s private sector non-financial debt and corporate non-financial debt as a share of GDP have fallen by nearly 30 percentage points.” Bank balance sheets were also corrected. All in all, the credit facility is once again in good shape.

The IMF predicts annual economic growth of just over 6% from 2023 to 2028, with per capita GDP growing about a percentage point slower. Such growth would be very close to the averages of the last three decades. As long as the country is not rocked by major global or domestic shocks, this seems perfectly feasible, even quite plausible. But what about the long term?

Remember that India still has a lot of room to catch up. It is also a young country, with an extremely underemployed workforce, the potential to improve the quality of that workforce, a reasonably high savings rate, and increasingly widespread hopes for greater prosperity. Major adaptation will be required to meet the challenge of climate change, given the failure to reduce global emissions. But the energy transition also offers great opportunities for India. All in all, I think the country should be able to sustain GDP per capita growth of 5% per year or more until 2050. With better policies, growth may even be a little higher, although it may also be lower.

So let’s assume that India’s GDP per capita continues to grow at 5% a year, while that of the United States grows at 1.4%, more or less, as it has for the past three decades. So, by 2050, India’s GDP per capita (in purchasing power) would reach about 30% of US levels, roughly where China’s is today. According to UN median predictions, India’s population would also be 4.4 times that of the United States. Therefore, its economy would be about 30% larger than that of the United States.

In short, it is quite reasonable to assume that India will become a great power. It’s not that hard to imagine that its economy will be similar in size to the US by 2050. So Western leaders are making a sensible bet on an alliance of convenience with India. But will India also be a liberal democracy? I will discuss this issue next week.

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