Will India’s economy continue to benefit from China’s own goals?

Wall Street is talking up India’s emergence as a key engine of global economic growth, amid high hopes for Modi’s third term
On Xi’s watch, China’s self-inflicted wounds from “zero Covid” chaos to the tech crackdown have only added to India’s appeal

William Pesek

Published: 3:30pm, 30 Apr 2024

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The China-versus-India debate of the past decade always seemed rather fanciful as Asia’s biggest economy boomed and hoovered up jobs and investment from every direction.

As 2024 unfolds, though, some of the globe’s top CEOs and investors rushing India’s way are entertaining the five most dangerous words in economics: things are different this time.

Apple is scaling up iPhone production in India’s youthful market of 1.4 billion people. Boeing is taking record orders. Tesla CEO Elon Musk is arguing that India has “more promise than any large country in the world”.

Consider, too, the reports that Wall Street is snubbing China for India in a historic shift. In January, India briefly overtook Hong Kong as the world’s fourth-largest equity market, the culmination of a US$6 trillion Chinese stock rout that began in 2021. Morgan Stanley predicts Mumbai will be the third-biggest equity bourse by 2030.

What makes such optimism different this time is a dynamic that Chinese President Xi Jinping can’t easily explain away: India’s rapid emergence as a key engine of global economic growth, as global investors bet that a third term for Prime Minister Narendra Modi might prove more successful than Xi’s.

This is economic fighting talk, of course. And caveats abound – big ones.

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It would be economic malpractice not to despair over India’s shoddy infrastructure vis-à-vis China’s. The same goes for India’s notorious red tape, overstretched education system and skilled worker deficits across industries. Modi’s strongman aspirations and anti-Muslim rhetoric turn off some multinational companies.

These challenges can make wagers that India’s US$3.4 trillion economy has a shot at catching up with China’s US$17.9 trillion economy seem as fanciful as ever.

Yet Barclays and other global investment names think India might indeed top China as the main driver of world growth in Modi’s next term. It’s widely expected that Modi’s Bharatiya Janata Party will win the election that began earlier this month and then accelerate economic development.

Part of the optimism concerns what Team Modi won’t do relative to Xi, who started his own third term last year. For all the criticism of Modi’s decade in power, he’s unlikely to clamp down on tech platforms or the private sector more broadly. Nor is New Delhi likely to erect new trade barriers or become less transparent in ways that repel global investment.

This gets at the high cost of Beijing’s policy mistakes since Xi took power more than a decade ago. Xi pledged early to let market forces play a “decisive” role in the economy. Yet then came the summer of 2015, when Chinese stocks went into free fall.

Shanghai stocks plunged 30 per cent in three weeks. Unfortunately, Team Xi took a wrong turn with its response to the rout.

Beijing scrambled to pump tidal waves of liquidity into the market, slash reserve requirements for banks, shelve initial public offerings, impose capital controls, loosen rules on leverage and allow people to use apartments as collateral to buy shares.

Yet officials were slow to treat the underlying causes of the mini-panic, as opposed to the symptoms. Beijing slow-walked moves to strengthen capital markets, reduce opacity, scale back the role of state-owned enterprises and increase regulatory certainty.

The crackdown beginning in late 2020 on tech platforms – including Alibaba, Baidu, Didi Global, JD.com and Tencent – spooked global investors anew. So did a quiet rehabilitation of SOEs at the expense of the private sector.

The self-inflicted wounds from the “zero-Covid” chaos demonstrated that party power still matters more than creating a freer, more dynamic economy. Ditto for Beijing’s ongoing efforts to remake Hong Kong, a place Nobel laureate Milton Friedman once admired, in China’s image.

Does anyone really know what Beijing is doing to repair the distressed property sector and head off deflationary risks? Or to rein in provincial finances? The US$9 trillion mountain of local government financing vehicle debt, most of it the off-balance-sheet kind, is 2.6 times India’s gross domestic product.

Chinese youth unemployment hit a record high last year, and the population is shrinking.

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It’s hard not to think India’s economy is the biggest winner from China’s own goals. Not only did Xi’s first two terms make things easier for India, but they also helped Modi paper over his own reform blunders.

“People are interested in India for several reasons, one is simply it’s not China,” Vikas Pershad, portfolio manager at M&G Investments, told Bloomberg. “There’s a genuine long-term growth story here.”

Yet here, too, there are many ifs to consider. India may enjoy a demographic dividend relative to China, but it will quickly become a dangerous liability if Modi’s party doesn’t ensure that India’s economy produces enough good-paying jobs.

In a March report, Nomura warned of India: “All that glitters is not growth. Underlying growth is weaker than what the headline suggests.” Nomura argued that India’s growth “is primarily supported by strong public capex growth, while private consumption and private capex remain subdued”. And the agricultural sector, a vital employer, has “underperformed”, in Nomura’s view.

Still, India’s economy clearly has momentum at a moment when many economists worry a Japan-style funk is in China’s near future, as Beijing seems more concerned about controlling top entrepreneurs than letting them disrupt the economy.

This isn’t a given. Beijing might well begin acting boldly to raise China’s odds of staying at the centre of Asia’s economic universe. But in the meantime, it is certainly making things easy for India to pull ahead.

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”