Think of India, and it is often images of ancient temples and over-crowded streets that come to mind. But make no mistake, India, now the world’s most populous country, is rapidly transforming itself.
The combination of key reforms and vast investments in infrastructure means that India is poised to see its economic growth rate move significantly higher. While China's per capita income growth has fast outpaced India's over the past twenty years, the future could see India emerge as a serious player in the global league-table of manufacturing exporters, allowing its citizens' income levels to leap upwards. Observers and investors alike have already taken note of this new dynamism, causing greater international investment to flow into India's capital markets.
There are competing schools of thought on how economies can best achieve sustainable development and improve social and economic outcomes. In the case of China, the model over the past three decades has centred on a vast pool of labour, deep and broad physical investments, and a clear focus on manufacturing goods for export markets. IMF data shows that after China joined the World Trade Organisation in 2001, its market share of US imports grew from 8.5 percent to a peak of 22 percent in 2018.
Over the same period, Mexico - another major manufacturing hub - saw its market share effectively stagnate at approximately 11 percent. However, if we fast-forward to the present day, we see that Mexico has overtaken China as the premier supplier to the United States. What does this mean? At a minimum, it demonstrates that global trade is highly competitive. Under the right conditions and with the appropriate policy framework, countries can evolve their economic business model and enable higher standards of living for their people. Manufacturing is often the key.
Since Independence in 1947, India has approached economic development quite differently. Things really began to move with the first large-scale liberalisation reforms in the 1990s. While there has always been heated debate across the political spectrum about the best policy framework, the goal of achieving higher GDP growth rates has never been disputed. To put this into context, according to the United Nations, global population growth is such that each year, an additional six million jobs are required to meet demand. However, rather than focus on manufacturing, as China has done, India has emerged as a service sector powerhouse especially in business process outsourcing.
The direction of development indicators puts India in a very positive light.
That said, there is a myriad of metrics available to measure economic development, and these go far beyond per capita income alone. Access to good healthcare, electricity, the internet, clean water, basic education, and so on are typical examples. Given that China's per capital income today is roughly five times that of India's, it should come as no surprise that most development indicators favour the former. Despite this, the direction of travel of these indicators puts India in a very positive light. For example, in 2003, only 65 percent of India's population had access to electricity, whereas in China this was already at about 100 percent. Today, both nations have universal electrification.
In terms of trade-related infrastructure, in 2003, China shipped 61 million 20-foot equivalent containers through its vast network of ports. India moved only four million. But by 2021, that number had grown to 20 million, with the growth rate outpacing China's. Looking ahead, the Government of India plans to triple its port capacity from 2010 levels by 2025. At the same time, investment in railway tracks and highways are also set to surge. Indeed, anyone visiting India's metropolises today, such as Mumbai and Delhi, can't miss the new transportation infrastructure being rapidly and efficiently put in place.
In broad terms, the Indian authorities recognised that cutting red tape and making public services available online would unleash economic potential. This applies both to large-scale infrastructure as well as to individual-level improvements. For example, today smartphones are ubiquitous in India, and this has revolutionised the delivery of government subsidies and social assistance to lower income groups. More broadly, the use of digital payment systems means that India is racing towards become a cashless society, echoing the same trends seen in China.
In terms of infrastructure delivery, previous projects took much longer to complete. Newer builds now have incentive schemes that reportedly see developers gain monetary awards if they deliver on time and on budget. This approach seems to align the various stakeholder interests much better and forms a solid foundation for achieving India’s ambitious infrastructure plans sooner rather than later.
So what does all this mean? We believe there’s good reason to be optimistic that India's potential economic growth rates can move meaningfully higher, particularly given the deployment of its vast new infrastructure and the expansion of its manufacturing exports. India is definitely worth considering for your portfolio.
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