The ultimate Asian-power shakeup could be on the horizon if India can sustain its current economic path. However, this could be more difficult than expected.
As the dawn sun rises over the slums of Dharavi, a seething slum in the heart of Mumbai, the noiseless maze of lanes that crawl through the carelessly crafted shelters slowly begin to shift. The city’s one million inhabitants blink their way into the morning heat of India. The sounds of devotional singing mix with the sounds of running water, a recent luxury for most homes in the area, and cough of imported Fiats choking their way to life. The recycling plants chug away, converting societal discards into knockoff barbie dolls.
The neighbourhood which has been called “the largest slum in Asia”, albeit with competition, sits in the middle of India’s financial capital, Mumbai. Dharavi, and its relatives in India hold a secret. Beyond the rusted tin walls, the tarpaulin roofs, and the hastily stacked mud bricks of India’s population lies a thriving economic industry, one which Bloomberg View pronounced six months ago as barrelling ahead, while their BRICS counterparts slow down.
The change, while not recent, has certainly become more pronounced. China has traditionally been viewed as the economic growth world capital after acting faster and more aggressively to lower trade barriers and by attracting foreign investment. However, India has seen large growth in the service industry, increasing its GDP per capita by more than double since the 1980s.
Numerous American and European firms have seen advantage in India’s lower wages and English-speaking ability, outsourcing many back-office and even legal and medical services to India, creating a $95 billion USD a year industry, and accounting for a fifth of Indian exports.
People power may be the key. India has the second-largest population in the world with 1.3 billion people, providing an ample workforce and entrepreneurial capacity.
While China’s population of 1.4bn remains larger than India’s, this is jeopardised by China’s One Child policy reducing future labour workers, despite being phased out from 2015. India is now predicted to overtake by the year 2050, with possible long-term effects on the economic progress of the two nations.
Demonetisation and destabilisation
While economic growth, particularly for developing countries, is typically seen as positive progress, creating a path of political stability, there are schools of thought that suggest that such rapid economic growth can be a profoundly destabilising force.
India has been characterised by economic instability in recent months, making it a volatile environment for external investors. Domestic politics have made India’s economic situation to become increasingly unforecastable with controversial decisions on interest rates, and demonetisation removing 86 percent of currency from circulation.
The demonetisation process and a lack of job growth have created a climate of uncertainty and anxiety, yet, as a positive result of demonetisation, India’s real estate prices have fallen, achieving one of the goals the controversial process aimed to achieve. Export revival from global growth will continue to help India, but risks the rising of oil prices, trade tensions escalating, and protectionism re-emerging.
All bets are on
However, India’s prospects remain good for international parties.
A report released by US based law firm Baker McKenzie stated that India will become a global hotspot in the next three years. This can be attributed to an accommodative stance by the Reserve Bank of India in an effort to encourage spending and create growth, and a strong domestic demand that has tripled both inbound and domestic acquisitions into India.
The outlook seems good: the same report surveyed 100 business leaders in the Asia Pacific finding that India was the most focused on improving its business environment in the region.
“When asked how much economic influence India was expected to have in the next five years across the Asia Pacific region,” said the Baker-McKenzie report, “a full 95% of senior executives see India as having a greater economic influence, including a third who see India as having far greater influence”.
“This compares with 76% of respondents that said China would have more influence in the region, and just 20% who said the US would have more influence”.
Baker-McKenzie predicts that the stability that the global economy has enjoyed in recent years will ease as a result of the US potentially becoming more inward looking and protectionist, and political movement in Europe with Brexit and elections.
“An increasing share of the growth in international trade and investment will by necessity come from intra-Asia Pacific activity,” said Gary Seib from Baker McKenzie.
To compete or cooperate
However, the question may not be whether India can overtake China to become an economic super-hub, but whether it should.
China’s president, Xi Jinping, said in 2014 that “the combination of the world’s factory and the world’s back office will produce the most competitive production base”. He was referring to China and India, respectively.
He said in the same article, “China-India relations have become one of the most dynamic and promising bilateral relations in the 21st century”.
If China and India can work together to create a cohesive and effective strategy, the economic ties could serve to create the largest economic powerhouse to date.
But this does not arise without complications. Relations between the countries since Jinping’s above statement in 2014 have become increasingly strained, including the blocking by China of Pakistani-based jihadist group Jaish-e-Mohammed leader Masood Azhar as a terrorist and India’s admission into Nuclear Suppliers Group (NSG). Intense competition in markets is damaging the economic ties that originally served as a buffer between the two nations.
This is evidenced by India’s new ‘Make in India’ strategy, which calls for further removal of bilateral economic ties. The state-run Chinese media said this week “as more economic competition is expected; greater uncertainty is likely to be present in future Chinese-Indian relations.”
India may be in a position poised for success, as a decline in offshoring hurts China greatly after the nation reaped huge benefits from the original manufacturing boom. However, as a developing country, India does not come without its faults.
In taking on China, while India’s growth in GDP was larger than China’s for a second year in a row, 20% of this number is still reliant on agricultural output, whereas a shift would see this move further.
Skilled workers may be a future issue, with India’s literacy rate among adults only 72%, compared to China’s 96%.
Its’ slow bureaucracy and lack of good infrastructure may be a deterrent to many foreign investors, while its overly-regulated industries do nothing to save the corruption that takes place where bribe demands are a routine part of daily life.
Slum cities like Dharavi were hastily built and are questionably durable. Similarly, while India has shown substantial growth in recent years, there are many inconsistencies and variables that will impact its future. After such rapid economic growth changing the game since the 1970s, it is impossible to say at present if this is sustainable trajectory.
India’s relationship with Asia is at a turning point, in fierce competition with China in a power-struggle where economic and political influence is the prize.