Is India ready to take China’s place in the global economy? That’s just wishful thinking

Australia and other US allies looking for potential trade and investment partners to reduce their reliance on China are knocking on India’s door
But India’s modest economic size, challenging investment environment and substandard infrastructure are major deterrents to fruitful collaboration

Sameed Basha

Published: 3:45pm, 15 Mar 2023

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When faced with sanctions from Beijing, Canberra exhibited a resilient front. Still, internal anxieties about the impact on its economy led Prime Minister Anthony Albanese to visit India recently, a potential export market and replacement for Australia’s economic ties with China.

Comparing China to India is like comparing apples with oranges, with the only similarity being their billion-plus populations. The United States is encouraging its allies like Australia to bet big on India as the slow process of decoupling investments from China begins.

India has been increasingly viewed as a natural ally to countries like Australia, which see it as an economic and military counterweight to China. They believe the best way for this to happen is through foreign direct investment into the country, to allow for a gradual transition of enterprises from China to India.

In its 2022 Investment Climate Statement on India, the US State Department called the country “a challenging place to do business” and highlighted its protectionist measures, increased tariffs and an inability to adjust from “Indian standards” to international standards.

The 2023 Index of Economic Freedom ranks India 131st in the world and 27th out of 39 economies in the Asia-Pacific region. The Indian government places equity limits on foreign capital in some sectors of the economy. In these sectors, according to the government’s circular of its FDI policy, beyond the cap imposed on foreign ownership, the entity must be “owned by/held with/in the hands of resident Indian citizens and Indian companies, owned and controlled by resident Indian citizens”.

In addition, ambiguities in the tax code have meant companies like Vodafone, Cairn Energy and GE Capital have found themselves in the cross hairs of tax authorities, putting into question India’s maturity as an FDI hub.

Visiting Australian Prime Minister Anthony Albanese is welcomed by Indian Prime Minister Narendra Modi during a ceremonial reception at the Presidential House in New Delhi, India, on March 10. The US is encouraging its allies like Australia to bet big on India as the slow process of decoupling investments from China begins. Photo: EPA-EFE

Such actions have seen India’s FDI inflows, as a share of the global total, fall from 3.4 per cent to 2.8 per cent between 2019 and 2021, whereas China’s share has have risen from 14.5 per cent to 20.3 per cent. In recent years, companies like Harley-Davidson and the Royal Bank of Scotland have either downsized or exited India, with German retailer Metro AG selling its operations after two decades in the country.

When one compares the relative size of their economies, China had a nominal gross domestic product of US$17.7 trillion in 2021, while India’s was US$3.2 trillion. India invests only 30 per cent of its GDP, compared with 50 per cent for China; and 20 per cent of its economy comes from manufacturing, as opposed to 30 per cent of China.

Investing in a domestic network of roads, airports, seaports and rail lines, as well as streamlining FDI regulations, allows China to move its products from factories to consumers efficiently, making it an attractive prospect for investment. That is not to mention the world-class infrastructure that has transformed the urban landscapes of both old and new cities within the country.

Despite India’s economic progress, poverty is still a defining feature in its sprawling metropolises. Former Reserve Bank of India governor Raghuram Rajan has also weighed in on the India-China competition, stating: “The argument that India will replace China is very premature as India is a much smaller economy as of now.”

Unfortunately, India is not currently in a place to deliver on the expectations placed on it by countries like Australia, which remain stuck in a geopolitical gambit with China. Simply banking on its large population is a fickle way of viewing the options amid a decoupling from China’s economy. India is still decades away from realising its true potential.

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The two countries’ goals also differ. China is transforming itself into a technologically driven economy in order to exceed the potential of the US. In contrast, India is attempting to position itself as a market-driven economy utilising its large population as a manufacturing base to compete with China.

Australia may be merely continuing along the tried and tested path of seeking “great and powerful friends”, as it has done in the past with the UK and America, to take care of it and help protect its interests. It may see in India a stable and uncomplicated trading partner compared to China.

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However, thorough planning is required to meet the challenges and avoid the risks before conducting business in such an environment, which appears absent from current conversations. In 2021, India was Australia’s sixth-largest two-way goods and services trading partner, valued at A$34.4 billion (US$22.9 billion), and the fourth-largest goods and services export market, valued at A$19.3 billion, representing a 4.2 per cent market share of Australia’s total exports.

However, China is Australia’s largest two-way trading partner, at A$267 billion, representing 32.2 per cent of Australia’s total trade. Some A$178 billion of goods and services made it to Chinese ports in 2020-2021. Australia hopes to expand bilateral trade to A$100 billion with India.

Anyone in Canberra who sees India as a viable substitute for China is seriously out of touch, and will be putting the nation’s export industries in a precarious position with their wishful geopolitical decisions not based on the realities on the ground.

Sameed Basha is a defence and political analyst with a master’s degree in international relations from Deakin University, Australia